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Sunlands Online Education Group (STG)
NYSE:STG
Risk Overview Q4, 2023
Risk Distribution
31% Finance & Corporate
30% Legal & Regulatory
16% Production
9% Ability to Sell
8% Tech & Innovation
6% Macro & Political
Finance & Corporate - Financial and accounting risks. Risks related to the execution of corporate activity and strategy
This chart displays the stock's most recent risk distribution according to category. TipRanks has identified 6 major categories: Finance & corporate, legal & regulatory, macro & political, production, tech & innovation, and ability to sell.
Risk Change Over Time
S&P500 Average
Sector Average
Risks removed
Risks added
Risks changed
Sunlands Online Education Group Risk Factors
New Risk (0)
Risk Changed (0)
Risk Removed (0)
No changes from previous report
The chart shows the number of risks a company has disclosed. You can compare this to the sector average or S&P 500 average.
The quarters shown in the chart are according to the calendar year (January to December). Businesses set their own financial calendar, known as a fiscal year. For example, Walmart ends their financial year at the end of January to accommodate the holiday season.
The quarters shown in the chart are according to the calendar year (January to December). Businesses set their own financial calendar, known as a fiscal year. For example, Walmart ends their financial year at the end of January to accommodate the holiday season.
Risk Highlights Q4, 2023
Main Risk Category
Finance & Corporate
With 27 Risks
Finance & Corporate
With 27 Risks
Number of Disclosed Risks
87
+3
From last reportS&P 500 Average: 31
87
+3
From last reportS&P 500 Average: 31
Recent Changes
20Risks added
5Risks removed
12Risks changed
Since Dec 2023
20Risks added
5Risks removed
12Risks changed
Since Dec 2023
Number of Risk Changed
12
+12
From last reportS&P 500 Average: 3
12
+12
From last reportS&P 500 Average: 3
See the risk highlights of Sunlands Online Education Group in the last period.
Risk Word Cloud
The most common phrases about risk factors from the most recent report. Larger texts indicate more widely used phrases.
Risk Factors Full Breakdown - Total Risks 87
Finance & Corporate
Total Risks: 27/87 (31%)Below Sector Average
Share Price & Shareholder Rights16 | 18.4%
Share Price & Shareholder Rights - Risk 1
You may experience dilution of your holdings due to the inability to participate in rights offerings.Share Price & Shareholder Rights - Risk 2
Our triple-class voting structure may render the ADSs representing our class A ordinary shares ineligible for inclusion in certain stock market indices, and thus adversely affect the trading price and liquidity of the ADSs.We cannot predict whether our triple-class share structure with different voting rights will result in a lower or more volatile market price of the ADSs, in adverse publicity, or other adverse consequences. Certain index providers have announced restrictions on including companies with multi-class share structures in certain of their indices. For example, S&P Dow Jones and FTSE Russell have changed their eligibility criteria for inclusion of shares of public companies on certain indices, including the S&P 500, to exclude companies with multiple classes of shares and companies whose public shareholders hold no more than 5% of total voting power from being added to such indices. As a result, our triple-class voting structure may prevent the inclusion of the ADSs representing our class A ordinary shares in such indices, which could adversely affect the trading price and liquidity of the ADSs representing our class A ordinary shares. In addition, several shareholder advisory firms have announced their opposition to the use of multiple class structure and our triple-class structure may cause shareholder advisory firms to publish negative commentary about our corporate governance, in which case the market price and liquidity of the ADSs could be adversely affected.
Share Price & Shareholder Rights - Risk 3
Our triple-class share structure with different voting rights will limit your ability to influence corporate matters and could discourage others from pursuing any change of control transactions that holders of our Class A ordinary shares and ADSs may view as beneficial.We have adopted a triple-class share structure such that our ordinary shares consist of Class A ordinary shares, Class B ordinary shares and Class C ordinary shares. In respect of matters requiring the votes of shareholders, each Class A ordinary share is entitled to one vote, each Class B ordinary share is entitled to seven votes, and each Class C ordinary share is entitled to ten votes. Each Class B ordinary share or Class C ordinary share is convertible into one Class A ordinary share at any time by the holder thereof. Class A ordinary shares are not convertible into Class B ordinary shares or Class C ordinary shares, Class B ordinary shares are not convertible into Class C ordinary shares, and Class C ordinary shares are not convertible into Class B ordinary shares under any circumstances.
Mr. Peng Ou, our founder and chairman of our board of directors, Mr. Tongbo Liu, our chief executive officer and director, and certain of our current and prior senior management and employees collectively beneficially own all of our issued and outstanding Class C ordinary shares. These Class C ordinary shares constitute approximately 48.6% of our total issued and outstanding share capital and 79.7% of the aggregate voting power of our total issued and outstanding share capital as of the date of this annual report. PV PLUTO LIMITED, an entity wholly owned and controlled by Primavera Capital Fund, beneficially owns all of our issued and outstanding Class B ordinary shares, which constitutes approximately 12.1% of our total issued and outstanding share capital and 13.8% of the aggregate voting power of our total issued and outstanding share capital as of the date of this annual report.
As a result of this triple-class share structure and the concentration of ownership, Mr. Peng Ou, Mr. Tongbo Liu and certain of our senior management and employees will have significant influence over the Group's business, including decisions regarding mergers, consolidations, liquidations and the sale of all or substantially all of our assets, election of directors and other significant corporate actions. They may take actions that are not in the best interest of the Group or our other shareholders. This concentration of ownership may discourage, delay or prevent a change in control of our company, which could have the effect of depriving our other shareholders of the opportunity to receive a premium for their shares as part of a sale of our company and may reduce the price of the ADSs. This concentrated control will limit your ability to influence corporate matters and could discourage others from pursuing any potential merger, takeover or other change of control transactions that holders of Class A ordinary shares and ADSs may view as beneficial.
Share Price & Shareholder Rights - Risk 4
The voting rights of holders of ADSs are limited by the terms of the deposit agreement, and you may not be able to exercise your right to direct the voting of your Class A ordinary shares underlying the ADSs.Holders of ADSs do not have the same rights as our registered shareholders. As a holder of the ADSs, you will not have any direct right to attend general meetings of our shareholders or to cast any votes at such meetings. You will only be able to exercise the voting rights which attach to the underlying Class A ordinary shares represented by your ADSs indirectly by giving voting instructions to the depositary in accordance with the provisions of the deposit agreement. Under the deposit agreement, you may vote only by giving voting instructions to the depositary, as holder of the underlying Class A ordinary shares represented by your ADSs. Upon receipt of your voting instructions, the depositary may try to vote the underlying Class A ordinary shares represented by your ADSs in accordance with your instructions. If we ask for your instructions, then upon receipt of your voting instructions, the depositary will try to vote the underlying Class A ordinary shares in accordance with those instructions. If we do not instruct the depositary to ask for your instructions, the depositary may still vote in accordance with instructions you give, but it is not required to do so. You will not be able to directly exercise any right to vote with respect to the underlying Class A ordinary shares unless you withdraw the shares and become the registered holder of such shares prior to the record date for the general meeting. When a general meeting is convened, you may not receive sufficient advance notice of the meeting to enable you to withdraw the underlying Class A ordinary shares represented by your ADSs and become the registered holder of such shares prior to the record date for the general meeting to allow you to attend the general meeting and to vote directly with respect to any specific matter or resolution to be considered and voted upon at the general meeting. In addition, under our fourth amended and restated articles of association, for the purposes of determining those shareholders who are entitled to attend and vote at any general meeting, our directors may close our register of members and/or fix in advance a record date for such meeting, and such closure of our register of members or the setting of such a record date may prevent you from withdrawing the Class A ordinary shares underlying your ADSs and becoming the registered holder of such shares prior to the record date, so that you would not be able to attend the general meeting or to vote directly. Where any matter is to be put to a vote at a general meeting, the depositary will notify you of the upcoming vote and to deliver our voting materials to you. We cannot assure you that you will receive the voting material in time to ensure you can direct the depositary to vote your shares. In addition, the depositary and its agents are not responsible for failing to carry out voting instructions or for their manner of carrying out your voting instructions. This means that you may not be able to exercise your right to direct how the underlying Class A ordinary shares represented by your ADSs are voted and you may have no legal remedy if the underlying Class A ordinary shares represented by your ADSs are not voted as you requested.
Share Price & Shareholder Rights - Risk 5
Certain judgments obtained against us by our shareholders may not be enforceable.We are a Cayman Islands exempted company and substantially all of our assets are located outside of the United States. Substantially all of the Group's current operations are conducted in China. In addition, most of our current directors and officers are nationals and residents of countries other than the United States. Substantially all of the assets of these persons are located outside the United States. As a result, it may be difficult or impossible for you to bring an action against us or against these individuals in the United States in the event that you believe that your rights have been infringed under the U.S. federal securities laws or otherwise. Even if you are successful in bringing an action of this kind, the laws of the Cayman Islands and of China may render you unable to enforce a judgment against our assets or the assets of our directors and officers.
Share Price & Shareholder Rights - Risk 6
You may face difficulties in protecting your interests, and your ability to protect your rights through U.S. courts may be limited, because we are incorporated under Cayman Islands law.We are an exempted company with limited liability incorporated under the laws of the Cayman Islands. Our corporate affairs are governed by our memorandum and articles of association, as amended from time to time, the Companies Act (As Revised) of the Cayman Islands and the common law of the Cayman Islands. The rights of shareholders to take action against our directors, actions by our minority shareholders and the fiduciary duties of our directors to the Group under Cayman Islands law are to a large extent governed by the common law of the Cayman Islands. The common law of the Cayman Islands is derived in part from comparatively limited judicial precedent in the Cayman Islands as well as from the common law of England, the decisions of whose courts are of persuasive authority, but are not binding, on a court in the Cayman Islands. The rights of our shareholders and the fiduciary duties of our directors under Cayman Islands law are not as clearly established as they would be under statutes or judicial precedent in some jurisdictions in the United States. In particular, the Cayman Islands has a less developed body of securities laws than the United States. Some U.S. states, such as Delaware, have more fully developed and judicially interpreted bodies of corporate law than the Cayman Islands. In addition, Cayman Islands companies may not have standing to initiate a shareholder derivative action in a federal court of the United States.
Shareholders of Cayman Islands exempted companies like us have no general rights under Cayman Islands law to inspect corporate records (other than copies of the memorandum and articles of association, the register of mortgages and charges, and any special resolutions passed by the shareholders) or to obtain copies of register of members of these companies. The Registrar of Companies of the Cayman Islands shall make available the list of the names of the current directors of the Company (and where applicable the current alternate directors of the Company) for inspection by any person upon payment of a fee by such person. Our directors have discretion under our articles of association to determine whether or not, and under what conditions, our corporate records may be inspected by our shareholders, but are not obliged to make them available to our shareholders. This may make it more difficult for you to obtain the information needed to establish any facts necessary for a shareholder motion or to solicit proxies from other shareholders in connection with a proxy contest.
As a result of all of the above, our public shareholders may have more difficulty in protecting their interests in the face of actions taken by our management, members of the board of directors or controlling shareholders than they would as public shareholders of a company incorporated in the United States.
Share Price & Shareholder Rights - Risk 7
There can be no assurance that we will not be a passive foreign investment company, or PFIC, for any taxable year, which could result in adverse U.S. federal income tax consequences to U.S. investors in the ADSs or our ordinary shares.In general, a non-U.S. corporation is a PFIC for U.S. federal income tax purposes for any taxable year in which (i) 75% or more of its gross income consists of passive income or (ii) 50% or more of the average quarterly value of its assets consists of assets that produce, or are held for the production of, passive income. For purposes of the above calculations, a non-U.S. corporation that owns at least 25% by value of the shares of another corporation is treated as if it held its proportionate share of the assets of the other corporation and received directly its proportionate share of the income of the other corporation. Cash is a passive asset for these purposes. Based on the composition of our income and assets and the value of our assets, including goodwill, which is based on the price of the ADSs, we do not believe we were a PFIC for the 2023 taxable year. However, it is not entirely clear how the contractual arrangements between our wholly-owned PRC subsidiaries, our consolidated affiliated entities and the shareholders of our consolidated affiliated entities will be treated for purposes of the PFIC rules. Because the treatment of the contractual arrangements is not entirely clear, because we hold a substantial amount of cash and because our PFIC status for any taxable year will depend on the composition of our income and assets and the value of our assets from time to time (which may be determined, in part, by reference to the market price of the ADSs or ordinary shares, which could be volatile), there can be no assurance that we will not be a PFIC for our current or any future taxable year. If we were a PFIC for any taxable year during which a U.S. investor holds ADSs or ordinary shares, certain adverse U.S. federal income tax consequences could apply to such U.S. investor. See "Item 10. Additional Information-10.E. Taxation-Material U.S. Federal Income Tax Considerations-Passive Foreign Investment Company Rules."
Share Price & Shareholder Rights - Risk 8
As an exempted company incorporated in the Cayman Islands, we are permitted to adopt certain home country practices in relation to corporate governance matters that differ significantly from the New York Stock Exchange corporate governance listing standards. These practices may afford less protection to shareholders than they would enjoy if we complied fully with the New York Stock Exchange corporate governance listing standards.As a Cayman Islands exempted company listed on the New York Stock Exchange, we are subject to New York Stock Exchange corporate governance listing standards. However, New York Stock Exchange rules permit a foreign private issuer like us to follow the corporate governance practices of its home country. Certain corporate governance practices in the Cayman Islands, which is our home country, may differ significantly from the New York Stock Exchange corporate governance listing standards. We have followed and intend to continue to follow Cayman Islands corporate governance practices in lieu of the corporate governance requirements of the New York Stock Exchange that listed companies must have: (i) a majority of independent directors; (ii) a nominating/corporate governance committee composed entirely of independent directors; and (iii) a compensation committee composed entirely of independent directors. To the extent we choose to follow home country practice in the future, our shareholders may be afforded less protection than they otherwise would enjoy under New York Stock Exchange corporate governance listing standards applicable to U.S. domestic issuers.
Share Price & Shareholder Rights - Risk 9
We are a foreign private issuer within the meaning of the rules under the Exchange Act, and as such we are exempt from certain provisions applicable to U.S. domestic public companies.Because we qualify as a foreign private issuer under the Exchange Act, we are exempt from certain provisions of the securities rules and regulations in the United States that are applicable to U.S. domestic issuers, including:
- the rules under the Exchange Act requiring the filing with the SEC of quarterly reports on Form 10-Q or current reports on Form 8-K;- the sections of the Exchange Act regulating the solicitation of proxies, consents or authorizations in respect of a security registered under the Exchange Act;- the sections of the Exchange Act requiring insiders to file public reports of their stock ownership and trading activities and liability for insiders who profit from trades made in a short period of time; and - the selective disclosure rules by issuers of material nonpublic information under Regulation FD.
We are required to file an annual report on Form 20-F within four months of the end of each fiscal year. In addition, we intend to publish our results on a quarterly basis as press releases, distributed pursuant to the rules and regulations of the NYSE. Press releases relating to financial results and material events will also be furnished to the SEC on Form 6-K. However, the information we are required to file with or furnish to the SEC are less extensive and less timely compared to that required to be filed with the SEC by U.S. domestic issuers. As a result, you may not be afforded the same protections or information that would be made available to you were you investing in a U.S. domestic issuer.
Share Price & Shareholder Rights - Risk 10
If securities or industry analysts do not publish research or reports about the Group's business, or if they adversely change their recommendations regarding the ADSs, the market price for the ADSs and trading volume could decline.The trading market for the ADSs will be influenced by research or reports that industry or securities analysts publish about the Group's business. If one or more analysts who cover the Group downgrade the ADSs, the market price for the ADSs would likely decline. If one or more of these analysts cease to cover the Group or fail to regularly publish reports on the Group, we could lose visibility in the financial markets, which in turn could cause the market price or trading volume for the ADSs to decline.
Share Price & Shareholder Rights - Risk 11
The trading price of the ADSs is likely to be volatile, which could result in substantial losses to investors.The trading price of the ADSs is likely to be volatile and could fluctuate widely due to factors beyond our control. This may happen because of broad market and industry factors, including the performance and fluctuation of the market prices of other companies with business operations located mainly in China that have listed their securities in the United States. In addition to market and industry factors, the price and trading volume for the ADSs may be highly volatile for factors specific to our own operations, including the following:
- variations in our revenues, earnings and cash flows;- announcements of new investments, acquisitions, strategic partnerships or joint ventures by the Group or our competitors;- announcements of new offerings, solutions and expansions by the Group or our competitors;- changes in financial estimates by securities analysts;- detrimental adverse publicity about the Group, the Group's services or the Group's industry;- announcements of new regulations, rules or policies relevant for the Group's business;- additions or departures of key personnel;- release of lockup or other transfer restrictions on our outstanding equity securities or sales of additional equity securities;- potential litigation or regulatory investigations;- allegations of a lack of effective internal control over financial reporting resulting in financial; inadequate corporate governance policies, or allegations of fraud, among other things, involving China-based issuers; and - any of these factors may result in large and sudden changes in the volume and price at which the ADSs will trade.
In the past, shareholders of public companies have often brought securities class action suits against those companies following periods of instability in the market price of their securities. If we were involved in a class action suit, it could divert a significant amount of management's attention and other resources from the Group's business and operations and require the Group to incur significant expenses to defend the suit, which could harm the Group's results of operations. Any such class action suit, whether or not successful, could harm the Group's reputation and restrict our ability to raise capital in the future. In addition, if a claim is successfully made against us, we may be required to pay significant damages, which could have a material adverse effect on the Group's financial condition and results of operations.
Share Price & Shareholder Rights - Risk 12
Certain of our existing shareholders have substantial influence over our company, and their interests may not be aligned with the interests of our other stockholders.Mr. Peng Ou, our founder and the chairman of our board of directors, owns approximately 65.4% of our voting power and Mr. Tongbo Liu, our director and our Chief Executive Officer, owns approximately 11.6% of our voting power as of the date of this annual report. In addition, Mr. Peng Ou, Mr. Tongbo Liu and certain of our senior management and employees collectively beneficially own approximately 7.7% of our issued and outstanding Class A ordinary shares and 96.2% of our issued and outstanding Class C ordinary shares, which constitute approximately 77.2% of the aggregate voting power of our total issued and outstanding share capital as of the date of this annual report. See "-Risks Related to the ADSs-Our triple-class share structure with different voting rights will limit your ability to influence corporate matters and could discourage others from pursuing any change of control transactions that holders of our Class A ordinary shares and ADSs may view as beneficial." As a result, Mr. Peng Ou, Mr. Tongbo Liu and certain of our senior management and employees have significant influence over the Group's business, including decisions regarding mergers, consolidations, liquidations and the sale of all or substantially all of our assets, election of directors and other significant corporate actions. This concentration of ownership may also have the effect of discouraging, delaying or preventing a future change of control, which could deprive our stockholders of an opportunity to receive a premium for their shares as part of a sale of our company and might reduce the price of the ADSs.
Share Price & Shareholder Rights - Risk 13
The shareholders of the VIEs may have actual or potential conflicts of interest with us, which may materially and adversely affect the Group's business and financial condition.The shareholders of the VIEs may have actual or potential conflicts of interest with us. These shareholders may refuse to sign or breach, or cause the VIEs to breach, or refuse to renew, the existing contractual arrangements we have with them and the VIEs, which would have a material and adverse effect on our ability to be considered as the primary beneficiary of the VIEs for accounting purposes and receive economic benefits from the VIEs. For example, the shareholders may be able to cause our agreements with the VIEs to be performed in a manner adverse to us by, among other things, failing to remit payments due under the contractual arrangements to us on a timely basis. We cannot assure you that when conflicts of interest arise any or all of these shareholders will act in the best interests of our company or such conflicts will be resolved in our favor. Currently, we do not have any arrangements to address potential conflicts of interest between these shareholders and our company. If we cannot resolve any conflict of interest or dispute between us and these shareholders, we would have to rely on legal proceedings, which could result in disruption of the Group's business and subject us to substantial uncertainty as to the outcome of any such legal proceedings.
Share Price & Shareholder Rights - Risk 14
Any failure by the VIEs or their respective shareholders to perform their obligations under our contractual arrangements with them would have a material and adverse effect on the Group's business.If any of the VIEs or their respective shareholders fail to perform their respective obligations under the contractual arrangements, we may have to incur substantial costs and expend additional resources to enforce such arrangements. We may also have to rely on legal remedies under PRC law, including seeking specific performance or injunctive relief, and claiming damages, which we cannot assure will be effective under PRC law. For example, if the shareholders of the VIEs refuse to transfer their equity interest in the VIEs to us or our designee if we exercise the purchase option pursuant to these contractual arrangements, or if they otherwise act in bad faith toward us, then we may have to take legal actions to compel them to perform their contractual obligations. In addition, if any third parties claim any interest in such shareholders' equity interests in the VIEs, our ability to exercise shareholders' rights or foreclose the share pledge according to the contractual arrangements may be impaired. If these or other disputes between the shareholders of the VIEs and third parties were to impair the contractual arrangements that make us the primary beneficiary of the VIEs for accounting purposes, our ability to consolidate the financial results of the VIEs would be affected, which would in turn result in a material adverse effect on the Group's business, operations and financial condition.
Share Price & Shareholder Rights - Risk 15
The ADSs will be delisted and the ADSs and shares will be prohibited from trading in the United States under the Holding Foreign Companies Accountable Act, or the HFCAA, if the PCAOB is unable to inspect or investigate completely auditors located in China for two consecutive years.Changed
As part of a continued regulatory focus in the United States on access to audit and other information currently protected by national law, in particular China's, the Holding Foreign Companies Accountable Act, or the HFCAA has been signed into law on December 18, 2020. The HFCAA states if the SEC determines that we have filed audit reports issued by a registered public accounting firm that has not been subject to inspection for the PCAOB for three consecutive years beginning in 2021, the SEC shall prohibit our ADSs from being traded on a national securities exchange or in the over-the-counter trading market in the U.S. On December 29, 2022, the Accelerating Holding Foreign Companies Accountable Act became the law, which reduced the time period before the ADSs could be delisted from the exchange and prohibited from over-the-counter trading in the U.S. from three consecutive years to two consecutive years. There is no certainty that we will be able to list the ADSs on a non-U.S. exchange or that a market for our shares will develop outside of the U.S. The delisting of the ADSs, or the threat of their being delisted, may materially and adversely affect the value of your investment.
On December 2, 2021, the SEC adopted final amendments to its rules implementing the HFCAA (the "Final Amendments"). The Final Amendments include requirements to disclose information, including the auditor name and location, the percentage of shares of the issuer owned by governmental entities, whether governmental entities in the applicable foreign jurisdiction with respect to the auditor has a controlling financial interest with respect to the issuer, the name of each official of the Chinese Communist Party who is a member of the board of the issuer, and whether the articles of incorporation of the issuer contains any charter of the Chinese Communist Party. The Final Amendments also establish procedures the SEC will follow in identifying issuers and prohibiting trading by certain issuers under the HFCAA.
On December 16, 2021, PCAOB issued the HFCAA Determination Report, according to which our auditor is subject to the determinations that the PCAOB is unable to inspect or investigate completely. In March 2022, the SEC issued its first "conclusive list of issuers identified under the HFCAA" indicating that those companies are now formally subject to the delisting provisions if they remain on the list for two consecutive years. We were conclusively added to the list on May 26, 2022 shortly after the filing of the annual report for the fiscal year ended on December 31, 2021 on Form 20-F.
On December 15, 2022, the PCAOB determined that it was able to secure complete access to inspect and investigate registered public accounting firms headquartered in mainland China and Hong Kong in 2022 and vacated its previous determinations to the contrary. As a result, we were not at risk of having our securities subject to trading prohibition under the HFCAA unless a new determination is made by the PCAOB. However, whether the PCAOB will continue to be able to satisfactorily conduct inspections of registered public accounting firms headquartered in mainland China and Hong Kong is subject to uncertainty and depends on a number of factors out of our, and our auditor's control. Should the PRC authorities obstruct or otherwise fail to facilitate the PCAOB's access in the future, the PCAOB may consider the need to issue a new determination and we would be at risk of having our securities subject to a trading prohibition under the HFCAA.
The HFCAA or other efforts to increase U.S. regulatory access to audit information could cause investor uncertainty for affected issuers, including us, and the market price of the ADSs could be adversely affected. If our auditor is unable to be inspected in time, we could be delisted from the New York Stock Exchange and the ADSs will not be permitted for trading in the United States either. Such a delisting would substantially impair your ability to sell or purchase the ADSs when you wish to do so, and the risk and uncertainty associated with delisting would have a negative impact on the price of the ADSs. Also, such a delisting would significantly affect our ability to raise capital on terms acceptable to us, or at all, which would have a material adverse impact on the Group's business, financial condition and prospects.
Share Price & Shareholder Rights - Risk 16
The PCAOB had previously been unable to inspect our auditor in relation to their audit work performed for the Group's financial statements. Such inability to inspect in the past has deprived our investors with the benefits of such inspections.Changed
Our auditor, the independent registered public accounting firm that issues the audit report included elsewhere in this annual report, as an auditor of companies that are traded publicly in the United States and a firm registered with the Public Company Accounting Oversight Board (United States), or the PCAOB, is subject to laws in the United States pursuant to which the PCAOB conducts regular inspections to assess its compliance with the applicable professional standards. Since our auditor is located in China, a jurisdiction where the PCAOB had been unable to conduct inspections without the approval of the Chinese authorities until 2022, our auditor was historically uninspected by the PCAOB. However, on August 26, 2022, the PCAOB signed a Statement of Protocol with the China Securities Regulatory Commission and the Ministry of Finance of the People's Republic of China governing inspections and investigations of audit firms based in China, which marks the first step toward providing access for the PCAOB to inspect and investigate registered public accounting firms headquartered in Mainland China and Hong Kong. On December 15, 2022, the PCAOB announced that it was able to conduct inspections and investigations completely of PCAOB-registered public accounting firms headquartered in mainland China and Hong Kong in 2022, and vacated its previous 2021 Determinations accordingly. This marks the first time that Chinese authorities allowed access for complete inspections and investigations meeting U.S. standards, as required under the Sarbanes-Oxley Act.
The past lack of the PCAOB inspections in China prevented the PCAOB from fully evaluating audits and quality control procedures of our independent registered public accounting firm, which made it more difficult to evaluate the effectiveness of our independent registered public accounting firm's audit procedures or quality control procedures as compared to auditors outside of China that were subject to the PCAOB inspections. Any future lack of the PCAOB inspections in China would prevent the PCAOB from fully evaluating audits and quality control procedures of our auditor, as a result of which we and investors will be deprived of the benefits of such PCAOB inspections, which could cause investors to lose confidence in our audit procedures and the quality of the Group's financial statements.
Accounting & Financial Operations5 | 5.7%
Accounting & Financial Operations - Risk 1
The Group's user metrics and other estimates are subject to inaccuracy in measuring the Group's operating performance, which may harm the Group's reputation.Accounting & Financial Operations - Risk 2
The custodians or authorized users of the Group's controlling non-tangible assets, including chops and seals, may fail to fulfill their responsibilities, or misappropriate or misuse these assets.Under the PRC law, legal documents for corporate transactions, including agreements and contracts are executed using the chop or seal of the signing entity or with the signature of a legal representative whose designation is registered and filed with relevant PRC industry and commerce authorities.
In order to secure the use of the Group's chops and seals, the Group has established internal control procedures and rules for using these chops and seals. In any event that the chops and seals are intended to be used, the responsible personnel will submit the application through the Group's office automation system and the application will be verified and approved by authorized employees in accordance with the Group's internal control procedures and rules. In addition, in order to maintain the physical security of the Group's chops, the Group generally has them stored in secured locations accessible only to authorized employees. Although the Group monitors such authorized employees, the procedures may not be sufficient to prevent all instances of abuse or negligence. There is a risk that the Group's employees could abuse their authority, for example, by entering into a contract not approved by the Group or seeking to gain control of one of the Group's subsidiaries or the VIEs. If any employee obtains, misuses or misappropriates the Group's chops and seals or other controlling non-tangible assets for whatever reason, the Group could experience disruption to the Group's normal business operations. The Group may have to take corporate or legal action, which could involve significant time and resources to resolve and divert management from the Group's operations.
Accounting & Financial Operations - Risk 3
Because we do not expect to pay dividends in the foreseeable future, you must rely on a price appreciation of the ADSs for a return on your investment.We currently intend to retain most, if not all, of our available funds and any future earnings to fund the development and growth of the Group's business. As a result, we do not expect to pay any cash dividends in the foreseeable future. Therefore, you should not rely on an investment in the ADSs as a source for any future dividend income.
Our board of directors has complete discretion as to whether to distribute dividends, subject to certain requirements of Cayman Islands law. Under Cayman Islands law, a Cayman Islands exempted company may pay a dividend out of either profit or share premium account, provided that in no circumstances may a dividend be paid if this would result in the company being unable to pay its debts as they fall due in the ordinary course of business. Even if our board of directors decides to declare and pay dividends, the timing, amount and form of future dividends, if any, will depend on our future results of operations and cash flow, our capital requirements and surplus, the amount of distributions, if any, received by the Group from our subsidiaries, the Group's financial condition, contractual restrictions and other factors deemed relevant by our board of directors. Accordingly, the return on your investment in the ADSs will likely depend entirely upon any future price appreciation of the ADSs. There is no guarantee that the ADSs will appreciate in value or even maintain the price at which you purchased the ADSs. You may not realize a return on your investment in the ADSs and you may even lose your entire investment in the ADSs.
Accounting & Financial Operations - Risk 4
If the Group fails to maintain an effective internal control over financial reporting, the Group may be unable to accurately and timely report our results of operations, meet our reporting obligations or prevent fraud and investor confidence in our company and the market price of the ADSs may decline.Changed
As a public company, we are subject to the Sarbanes-Oxley Act of 2002. Section 404 of the Sarbanes-Oxley Act of 2002 requires us to evaluate and determine the effectiveness of the Group's internal control over financial reporting, report any material weaknesses in such internal controls and provide a management report on internal control over financial reporting.
The Group's management has concluded that the Group's internal control over financial reporting was effective as of December 31, 2023. See "Item 15. Controls and Procedures-Management's Annual Report on Internal Control over Financial Reporting." We are exempt from the requirement of an attestation report issued by our registered public accounting firm because we are a non-accelerated filer. The Group will endeavor to maintain an effective internal control system, but any failure may cause the Group's management not be able to conclude that the Group has effective internal control over financial reporting at a reasonable assurance level. To the extent the Group's independent registered public accounting firm is required to attest to, and report on, the effectiveness of the Group's internal control over financial reporting in the future, it may not be able to conclude that the Group has effective internal control over financial reporting at a reasonable assurance level. This could in turn result in the loss of investor confidence in the reliability of the Group's financial statements and negatively impact the trading price of the ADSs. Furthermore, the Group has incurred and may need to incur additional costs and use additional management and other resources in an effort to comply with Section 404 of the Sarbanes-Oxley Act and other requirements going forward.
In addition, there is no assurance that we or our auditor will not identify deficiencies in the Group's internal control over financial reporting that are deemed to be material weaknesses and render the Group's internal control over financial reporting ineffective for any future periods. If the Group fails to maintain the adequacy of its internal control over financial reporting, as these standards are modified, supplemented or amended from time to time, the Group may not be able to conclude on an ongoing basis that the Group has effective internal control over financial reporting in accordance with Section 404. Generally speaking, if the Group fails to achieve and to maintain effective internal control environment, we could suffer material misstatements in our financial statements and fail to meet our reporting obligations, which could cause investors to lose confidence in our reported financial information. This could in turn limit our access to capital markets, harm our results of operations, and lead to a negative impact on the trading price of the ADSs. Additionally, ineffective internal control over financial reporting could expose the Group to increased risk of fraud or misuse of corporate assets and subject the Group to potential delisting from the NYSE, regulatory investigations and civil or criminal sanctions.
Accounting & Financial Operations - Risk 5
The Group is subject to the uncertainty to continue to achieve profitability in the future.Added
The Group had net income of RMB212.4 million, RMB643.0 million and RMB640.8 million (US$90.3 million) in 2021, 2022 and 2023, respectively. Historically, the Group had recorded net losses. We cannot assure you that the Group will be able to continue to generate net profits in the future.
The Group intends to continue to invest heavily for the foreseeable future in increasing the Group's market share, improving the capacity of the Group's technology infrastructure to better support an even larger student base and to offer additional courses and educational content.
These efforts may be more costly than the Group expects and the Group's net revenues may not increase sufficiently to offset these expenses. The Group may continue to take actions and make investments that do not generate optimal short-term financial results and may even result in increased operating losses in the short term with no assurance that the Group will eventually achieve the Group's intended long-term benefits or profitability. These factors, among others set out in this "Item 3. Key Information-3.D. Risk Factors," may negatively affect the Group's ability to achieve profitability in the near term, if at all.
Debt & Financing3 | 3.4%
Debt & Financing - Risk 1
We face uncertainty with respect to indirect transfers of equity interests in PRC resident enterprises by their non-PRC holding companies.Debt & Financing - Risk 2
Tuition refunds or potential refund disputes may negatively affect the Group's cash flow, financial condition, and reputation.The Group offers different tuition refund options to students depending on the time of enrollment and subject to certain conditions and restrictions in the service contract between the Group and each student. Generally, a student is offered a full, unconditional refund within 24 hours upon enrollment. If the student makes a refund request after taking at least one live streaming course lasting 30 minutes by reason of any material academic issue of the Group's courses within certain refund period, the Group offers a refund excluding the registration fees and the fees of delivered courses upon the Group's confirmation. In addition, the Group offers students a refund for the undelivered courses excluding the registration fees. Starting from June 2019, the Group offers such refund during the entire service period. When calculating gross billings for a specific period, the Group deducts the total amount of refunds from the total amount of cash received for the sale of course packages for such period. See "Item 4. Information on the Company-4.B. Business Overview-Tuition and Fees."
In 2021, 2022 and 2023, the Group had made RMB282.5 million, RMB172.2 million and RMB94.2 million (US$13.3 million) of refund payments, respectively, most of which were made pursuant to the Group's tuition refund policy, see "Item 4. Information on the Company-4.B. Business Overview-Tuition and Fees." The number of refund requests and the amount of refunds could be affected by a number of factors. These factors include, without limitation to, student dissatisfaction with the Group's teaching quality and the Group's course and educational content offerings, privacy concerns relating to the Group's online platforms, negative publicity regarding the Group or online education in general, the terms and scope of the Group's refund policy, and any change or development in PRC laws and regulations with respect to fees and tuitions charged by online education providers like the Group. See "-The Group faces risks associated with the lack of a private school operating permit for online education services as well as uncertainties surrounding PRC laws and regulations governing the education industry in general, including the Law for Promoting Private Education and its Implementing Rules." As part of the Group's efforts to enhance user experience, from June 2019, the Group amended certain terms of refund policy to facilitate a more flexible and smoother refund process. Any refund payments that the Group may be required to make to the students, as well as the expenses the Group could incur for processing refunds and resolving refund disputes, could be substantial and could adversely affect the Group's gross billings, net revenues, liquidity and financial condition. A high volume of refunds and refund disputes may also generate negative publicity that could harm the Group's reputation. The Group has experienced in the past, and may experience in the future, negative publicity in relation to refund disputes between the Group and the students, which may significantly harm the Group's brand name and divert the Group's attention from operating business.
Debt & Financing - Risk 3
We may rely on dividends and other distributions on equity paid by our PRC and Hong Kong subsidiaries to fund any cash and financing requirements we may have, and any limitation on the ability of these subsidiaries in the PRC, including Hong Kong, to make payments to us could have a material and adverse effect on our ability to conduct the Group's business.Changed
We are a Cayman Islands holding company and we rely principally on dividends and other distributions on equity from our PRC and Hong Kong subsidiaries for our cash requirements, including for services of any debt we may incur. To the extent cash in the business is in the PRC, including Hong Kong, or a PRC (including Hong Kong) entity, the funds may not be available to fund operations or for other use outside of the PRC or Hong Kong due to interventions in or the imposition of restrictions and limitations by the PRC government to transfer cash from a PRC entity to the use outside the PRC. Our subsidiaries are permitted to pay dividends to their shareholders, and eventually to Sunlands Technology Group, only out of their retained earnings, if any, as determined in accordance with the applicable accounting standards and regulations. Such payment of dividends by entities registered in China, including Hong Kong, is subject to limitations, which could result in limitations on the availability of cash to fund dividends or make distributions to holders of our securities. For example, our PRC subsidiaries and the VIEs are required to make appropriations to certain statutory reserve funds or may make appropriations to certain discretionary funds, which are not distributable as cash dividends except in the event of a solvent liquidation of the companies.
Our PRC subsidiary's ability to distribute dividends is based upon its distributable earnings. Current PRC regulations permit our PRC subsidiaries to pay dividends to its respective shareholders only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. In addition, each of our PRC subsidiary, the VIEs and their respective subsidiaries are required to set aside at least 10% of its after-tax profits each year, if any, to fund a statutory reserve until such reserve reaches 50% of its registered capital. These reserves are not distributable as cash dividends. If our PRC subsidiaries incur debt on their own behalf in the future, the instruments governing the debt may restrict their ability to pay dividends or make other payments to us. Any limitation on the ability of our PRC subsidiaries to distribute dividends or other payments to their respective shareholders could materially and adversely limit our ability to grow, make investments or acquisitions that could be beneficial to the Group's businesses, pay dividends or otherwise fund and conduct the Group's business.
To address the persistent capital outflow and the depreciation of Renminbi against U.S. dollars in the fourth quarter of 2016, the People's Bank of China and the State Administration of Foreign Exchange, or SAFE, implemented a series of capital control measures in the subsequent months, including stricter vetting procedures for China-based companies to remit foreign currency for overseas acquisitions, dividend payments and shareholder loan repayments. For instance, the Circular on Promoting the Reform of Foreign Exchange Management and Improving Authenticity and Compliance Review, or the SAFE Circular 3, issued on January 26, 2017, provides that the banks shall, when dealing with dividend remittance transactions from domestic enterprise to its offshore shareholders of more than US$50,000, review the relevant board resolutions, original tax filing form and audited financial statements of such domestic enterprise based on the principal of genuine transaction. The PRC government may continue to strengthen its capital controls and our PRC subsidiaries' dividends and other distributions may be subject to tightened scrutiny in the future. Any limitation on the ability of our PRC subsidiaries to pay dividends or make other distributions to us could materially and adversely limit our ability to grow, make investments or acquisitions that could be beneficial to the Group's business, pay dividends, or otherwise fund and conduct the Group's business.
In addition, the Enterprise Income Tax Law and its implementation rules provide that a withholding tax rate of up to 10% will be applicable to dividends payable by Chinese companies to non-PRC-resident enterprises unless otherwise exempted or reduced according to treaties or arrangements between the PRC central government and governments of other countries or regions where the non-PRC resident enterprises are incorporated.
For details about the applicable regulations and rules relating to such cash transfers through our Group, see "Item 3. Key Information-Restrictions on Foreign Exchange and the Ability to Transfer Cash between Entities, Across Borders and to U.S. Investors." and "-Governmental control of currency conversion may limit the Group's ability to utilize the Group's net revenues effectively and affect the value of your investment."
Corporate Activity and Growth3 | 3.4%
Corporate Activity and Growth - Risk 1
If the Group fails to effectively identify, pursue and consummate strategic alliances or acquisitions, the Group's ability to grow and to achieve profitability could be impacted.Corporate Activity and Growth - Risk 2
If the Group cannot maintain the corporate culture as the Group grows, the Group could lose the innovation, collaboration and focus that contribute to the Group's business.We believe that a critical component of the Group's success is the corporate culture, which fosters innovations and has roots in a deep understanding of the students and the evolving education industry in China. As the Group continues to expand and grow its business, it may find it difficult to maintain these valuable aspects of the Group's corporate culture. Any failure to preserve the culture could undermine the Group's reputation in the marketplace and negatively impact the Group's ability to attract and retain employees and students, which would in turn jeopardize the Group's future success.
Corporate Activity and Growth - Risk 3
If the Group fails to manage its business growth effectively, the success of the Group's business model will be compromised.Added
The Group's growth strategy has placed, and will continue to place, a significant strain on the Group's sales and marketing capacities, administrative and operating infrastructure, facilities and other resources. To maintain the Group's growth, the Group needs to continue to acquire more students, scale up the Group's course offerings, increase the Group's academic and administrative faculty, as well as strengthen the Group's platforms and systems. The Group will also be required to refine the Group's operational, financial and management controls and reporting systems and procedures. If the Group fails to efficiently manage the Group's business expansion, the Group's costs and expenses may increase more than the Group plans and the Group may not successfully attract a sufficient number of students and qualified academic and administrative faculty in a cost-effective manner, respond to competitive challenges, or otherwise execute the Group's business plans. In addition, the Group may, as part of carrying out the Group's growth strategies, adopt new initiatives to offer additional course packages and educational content and to implement new pricing models and strategies. We cannot assure you that these initiatives may achieve the anticipated results. These proposed changes may not be well received by the Group's existing and prospective students, in which case their experience with the Group's education services may suffer, which could damage the Group's reputation and business prospect.
The Group's ability to effectively implement the Group's strategies and manage the Group's business growth will depend on a number of factors, including the Group's ability to: (i) identify and effectively market the Group's products and services in new markets with sufficient growth potential; (ii) develop and improve course offerings and educational contents to make them appealing to existing and prospective students, including working adult students; (iii) maintain and increase the Group's student enrollments; (iv) effectively recruit, train and motivate a large number of new employees, including the Group's faculty members and sales and marketing personnel; (v) successfully implement enhancements and improvements to the systems and platforms; (vi) continue to improve the Group's operational, financial and management controls and efficiencies; (vii) protect and further develop the Group's intellectual property rights; and (viii) make sound business decisions in light of the scrutiny associated with operating as a public company. These activities require significant capital expenditures and investment of valuable management and financial resources, and the Group's growth will continue to place significant demands on the Group's management. There are no guarantees that the Group will be able to effectively manage any future growth in an efficient, cost-effective and timely manner, or at all. The Group's growth in a relatively short period of time is not necessarily indicative of results that the Group may achieve in the future. If the Group does not effectively manage the growth of the Group's business and operations, the Group's reputation, results of operations and overall business and prospects could be negatively impacted.
The Group's net revenues were RMB2,507.8 million, RMB2,323.1 million and RMB2,159.6 million (US$304.2 million), respectively, in 2021, 2022 and 2023. During the same periods, the Group's gross billings were RMB1,970.0 million, RMB1,496.7 million and RMB1,504.6 million (US$211.9 million), respectively, and the Group's new student enrollments were 434,228, 534,280 and 616,341, respectively. The Group is seeking to offer a broader range of courses, foster a more social and entertaining learning experience, and use cutting-edge technologies, particularly artificial intelligence, to improve students' learning experience and outcomes. All of these endeavors involve risks and will require significant management, financial and human resources. We cannot assure you that they will achieve the anticipated results or that the Group's gross billings and new student enrollments will not decline in the future due to the risks and uncertainties discussed in this "Item 3. Key Information-3.D. Risk Factors." If the Group is not able to achieve growth in the Group's gross billings and new student enrollments effectively, or at all, the Group's business and prospects may be materially and adversely affected.
Legal & Regulatory
Total Risks: 26/87 (30%)Above Sector Average
Regulation16 | 18.4%
Regulation - Risk 1
The failure to obtain and maintain other approvals, licenses, permits or filings applicable to the Group's business could have a material adverse impact on the Group's business, financial conditions and results of operations.Added
Regulation - Risk 2
The Group faces regulatory risks and uncertainties with respect to the licensing requirement for the online transmission of internet audio-visual programs.Added
On December 20, 2007, the State Administration of Press Publication Radio Film and Television, or SAPPRFT, and the Ministry of Industry and Information Technology, or MIIT, jointly promulgated the Administrative Provisions on Internet Audio Visual Program Services, or the Audio Visual Program Provisions, which became effective on January 31, 2008 and were amended on August 28, 2015. Among other things, the Audio Visual Program Provisions stipulate that no entities or individuals may provide Internet audio-visual program services without a License for Online Transmission of Audio-Visual Programs issued by SAPPRFT or completing the relevant filing with SAPPRFT or its local bureaus, and only state-owned or state-controlled entities are eligible to apply for a License for Online Transmission of Audio-Visual Programs. On April 1, 2010, SAPPRFT promulgated the Provisional Implementations of Tentative Categories of Internet Audio Visual Program Services, or the Categories, which clarified the scope of Internet audio-visual programs services, which was amended on March 10, 2017. According to the Categories, there are four categories of Internet audio-visual program services which are further divided into seventeen sub-categories. Sub-category No. 3 to the second category covers the making and editing of certain specialized audio-visual programs concerning, among other things, educational content, and broadcasting such content to the general public online. Sub-category No. 5 of the first category and sub-category No. 7 of the second category cover the live broadcasting of important political, martial, economic, social, cultural, sports activities or events or general social or community cultural activities, sports games and other organized activities. However, there are still significant uncertainties relating to the interpretation and implementation of the Audio Visual Program
Provisions, in particular, the scope of "internet audio-visual programs." See "Item 4. Information on the Company-4.B. Business Overview-Regulation-Regulations Relating to Online Transmission of Audio-Visual Programs."
The Group delivers courses in live streaming format. The Group's teachers and students communicate and interact live with each other via the Group's virtual learning community. The audio and video data are transmitted through the platforms between specific recipients instantly without any further redaction. We believe the nature of the raw data the Group transmits distinguishes the Group from general providers of internet audio-visual program services, such as the operator of online video websites, and the provision of the Audio-Visual Program Provisions are not applicable with regard to the Group's offering of the courses. However, we cannot assure you that the competent PRC government authorities will not ultimately take a view contrary to the Group's opinion. In addition, the Group also offers video recordings of live streaming courses and certain other audio-video contents on the Group's online platforms to students as supplementary course materials. If the government authorities determine that the Group's offering of the courses fall within the relevant category of Internet audio-visual program services under the Categories, the Group may be required to obtain the License for Online Transmission of Audio-Visual Programs.
The Categories describe "Internet audio-visual program services" in a very broad, vague manner and are unclear as to whether online courses, whether delivered in a live streaming format or through video recordings, fall into the definition of audio-visual programs. The Group has made inquiries to the relevant bureaus of SAPPRFT and was informed that online educational content provided through live streaming or recorded courses does not fall within the scope of internet audio-visual programs, the transmission of which does not require a License for Online Transmission of Audio-Visual Programs. We cannot assure you that the PRC government will not ultimately take a view that live streaming or recorded courses or any other content offered on the Group's platforms are subject to the Audio Visual Program Provisions. The Group currently does not hold a License for Online Transmission of Audio-Visual Programs, and since the Group is not a state-owned or state-controlled entity, the Group is not eligible to apply for such license. If the PRC government determines that the Group's content should be considered as "internet audio-visual programs" for the purpose of the Audio-Visual Program Provisions, the Group may be required to obtain a License for Online Transmission of Audio-Visual Programs. The Group is, however, not eligible to apply for such license since the Group is not a state-owned or state-controlled entity. If this were to occur, the Group may be subject to penalties, fines, legal sanctions or an order to suspend the provision of the Group's live streaming courses. As of the date of this annual report, the Group has not received any notice of warning or been subject to penalties or other disciplinary action from the relevant governmental authorities regarding the lack of a License for Online Transmission of Audio-Visual Programs in conducting of the Group's business.
Regulation - Risk 3
The Group faces regulatory risks and uncertainties associated with the Group's teachers' lack of teaching licenses.Added
Pursuant to the Amended Implementing Rules and the Implementation Rules, the teachers employed by a for-profit private school shall obtain the teaching licenses or relevant professional skill qualifications required by PRC laws and regulations, although the definition or the scope of the "relevant professional skill qualifications" is not explicitly stated in the Implementation Rules. A substantial majority of the Group's teachers currently do not hold teaching licenses.
As of the date of this annual report, the Group has not received any notice of warning or been subject to any penalties or disciplinary action from government authorities due to the lack of teaching licenses. The current PRC laws and regulations, including the Amendment, the Amended Implementing Rules and the Implementation Rules, remain unclear as to whether the teachers of an online education service provider who provides adult online education and adult personal interest learning education like the Group are required to obtain and hold teaching licenses. We cannot assure you that the PRC government authorities will not take a contrary view. In the event that in the future the Group's teachers are required by laws to obtain teaching licenses, we cannot assure you that they can meet the requirements for applying for teaching licenses. If the Group's teachers are not able to apply for and obtain the teaching licenses on a timely basis, or at all, the Group may be ordered to rectify such noncompliance or subject to penalties under the then-effective PRC laws and regulations, in which case the Group's business may be disrupted, and the Group's financial condition, reputation and prospects would be materially and adversely affected.
Regulation - Risk 4
Significant uncertainties exist in relation to the interpretation and implementation of, or proposed changes to, the PRC laws, regulations and policies regarding the education industry.Added
The PRC private education industry, especially the after-school tutoring sector, has experienced intense scrutiny and has been subject to significant regulatory changes recently. In particular, the Opinions on Further Alleviating the Burden of Homework and After-School Tutoring for Students in Compulsory Education jointly promulgated by the General Office of State Council and the General Office of Central Committee of the Communist Party of China on July 24, 2021, or the Alleviating Burden Opinion, sets out a series of operating requirements on after-school tutoring institutions. Furthermore, on August 14, 2021, the Beijing Municipality Government and the Beijing Municipal Committee of the Communist Party of China jointly published the full text of the Beijing Municipality's Measures to Further Reduce the Burden of Homework and After-School Tutoring on Students in Compulsory Education in Beijing, or the Beijing Measures, to implement the Alleviating Burden Opinion.
As of the date of this annual report, the Group's business, financial condition, results of operations and prospect have not been materially and adversely affected by the scrutiny on the PRC private education industry. It is uncertain whether and how the PRC government would promulgate additional laws, regulations and guidance regarding the education industry and apply more stringent social and ethical standards to those promulgated laws, regulations and guidance in the education sector in general. The Group is closely monitoring the evolving regulatory environment and will make efforts to seek guidance from and cooperate with the government authorities to comply with laws, regulations and policies, if applicable to the Group's business. Due to the complexity and substantial uncertainty of the regulatory environment, we cannot assure you that the Group could be in full compliance with newly promulgated laws and regulations or other applicable laws, regulations and policies in a timely manner, or at all. Failure to regain compliance may subject the Group to fines or other penalties or be required to terminate certain operations, in which case the Group's business, financial condition and results of operations could be materially and adversely affected further. For more details of the relevant laws and regulations, please refer to "Item 4. Information on the Company-4.B. Business Overview-Regulation."
Regulation - Risk 5
The Group faces risks associated with the lack of a private school operating permit for online education services as well as uncertainties surrounding PRC laws and regulations governing the education industry in general, including the Law for Promoting Private Education and its Implementation Rules.Added
Wuhan Shangde, our wholly-owned subsidiary, and Beijing Sunlands and a number of other VIEs through which the Group operates its online education business, currently do not hold a private school operating permit, and the Group may be subject to risks of administrative sanctions due to the Group's lack of such permit.
On November 7, 2016, China's National People's Congress passed an amendment to the Promotion of Private Education Law, or the Amendment, which became effective on September 1, 2017. The Amendment applies different regulatory requirements to non-profit and for-profit private schools.
In December 2016, several PRC government agencies, including the MOE, the State Administration for Industry and Commerce which has now merged into the newly-established State Administration for Market Regulation, or the SAMR, and the Ministry of Human Resources and Social Welfare, jointly promulgated the Implementation Rules on the Supervision and Administration of For-profit Private Schools, or the Implementation Rules. Under the Implementation Rules, the establishment, division, merger or any other material change in a for-profit private school shall be approved by the competent education authorities or the authorities in charge of labor and social welfare and be registered with the competent local branch of SAMR, and a duly approved private school will be granted a private school operating permit. The Implementation Rules also provide that the provisions contained therein should be applicable to "for-profit private training institutions" in an analogous manner. See "Item 4. Information on the Company-4.B. Business Overview-Regulation-Regulation Relating to Private Education-The Law for Promoting Private Education and its Implementing Rules."
As of the date of this annual report, the Group has not received any notice of warning or been subject to any penalties or disciplinary action from government authorities due to the lack of a private school operating permit for online education services. In April 2021, the State Council promulgated the Amended Regulations on the Implementation of Law for Promotion Private Education Law of PRC, or Amended Implementing Rules, which became effective on September 1, 2021. The Amended Implementing Rules provide, among others, that a private school engaging in online education activities using internet technology shall obtain an appropriate private school operating permit. The Amended Implementing Rules, however, do not specify whether an online tutoring service provider like the Group shall obtain such private school operating permit and what requirements that an online tutoring service provider like the Group need to satisfy in order to obtain a private school operating permit, nor does it specify which level of government authority has the authority to accept and examine the Group's application for the private school operating permit. According to the Q&A published on the official website of Beijing Municipal Education Commission in April 2022, the education department is only responsible for the issues related to institutions providing academic subjects tutoring services for primary and secondary school. We cannot assure you that the PRC government will not in the future require the Group to obtain a private school operating permit. If the PRC government requires the Group to obtain a private school operating permit or introduces additional amendments and guidelines to expand the coverage of the Amendment or Amended Implementing Rules to explicitly cover online education service providers, and if the Group fails to do so, the Group may be subject to fines up to five times the illegitimate gains generated from the provision of training services without a proper license, other administrative sanctions, such as being ordered to refund tuition payments to the students, or criminal liabilities, for the lack of a private school operating permit. The Group may also be subject to regulatory requirements that are more stringent than the ones currently applicable to the Group, including those relating to sales and marketing, courses and educational content offerings, teachers' qualification, as well as tuition fee rates and tuition refund policies, or laws and regulations that require the Group to obtain and maintain additional licenses and permits, and the Group may incur substantial expenses or alter or change the Group's business to comply with these requirements. For example, pursuant to the Interim Measures of Wuhan for the Administration of Private Training Institutions promulgated by Wuhan Municipal Government effective on March 15, 2018, private training institutions shall abide by the following provisions with respect of refund fees: (i) if a student requires a refund before the beginning of the course, the institution shall refund all the fees paid to it with deduction of the educational service fees and other fees actually incurred; (ii) if a student requires a refund after the beginning of the course, the institution shall refund the remaining part of the fees after deducting the corresponding proportion of the tuition fees, the fees for collection and management and the relevant taxes and fees in accordance with the proportion of the class hours completed; (iii) where an institution fails to fulfill the commitments with the student, and the student requires a refund, the institution shall refund all the fees paid by the student; and (iv) the institution shall complete the examination and verification within three working days upon the receipt of the refund requirement and shall refund to the student within 30 days. It is uncertain as to whether and how such measures and rules would be applicable to the Group, and whether any future laws and regulations with respect to the tuition refund requirements for online education service providers like the Group will be introduced. The Group has been exposed to refund dispute between the Group and students in the past. We cannot assure you that if the Group is subject to more stringent refund regulatory requirements, the Group can adjust the Group's refund policy to comply with these requirements on a timely manner, which may cause the Group's more refund disputes with students and may have a material and adverse effect on the Group's business, operating results and financial condition.
Under the Amendment and the Implementation Rules, a material change in a for-profit private school shall be approved by the competent education authorities or the authorities in charge of labor and social welfare before it can be registered with the competent local branch of SAMR. If the Group was required to expand the authorized scope of the Group's business license to cover the Group's business of online education services, which shall be registered with the SAMR, to comply with applicable licensing requirements, the Group may not able to do so before the Group has obtained a private school operating permit. If any of the foregoing were to happen, the Group's business operations may be disrupted, and the Group's financial condition, results of operations and reputation may be materially and adversely affected.
Moreover, the MOE, jointly with certain other PRC government authorities, promulgated the Opinions on Guiding and Regulating the Orderly and Healthy Development of Educational Mobile Apps on August 10, 2019, or the Opinions on Educational Apps, which requires, among others, mobile apps that offer services for school teaching and management, student learning and student life, or home-school interactions, with school faculty, students or parents as the main users, and with education or learning as the main application scenarios, be filed with the competent provincial regulatory authorities for education before the end of 2019. In addition, on November 11, 2019, MOE issued the Administrative Measures on Filing of Educational Mobile Apps, which requires, among others, that educational mobile app providers shall file their educational mobile apps and that filings of existing educational mobile apps shall be completed before January 31, 2020. See "Item 4. Information on the Company-4.B. Business Overview-Regulation-Regulations on Online and Distance Education." The educational mobile app Shangde Jigou had been filed with competent regulatory authority as required under the Opinions on Educational Apps. However, as the Opinions on Educational Apps are relatively new and evolving, and the Group's business model and practices are continuing to evolve and change, we cannot assure you that the Group is in full compliance with all relevant rules and will be able to complete or maintain such filing in relation with any of the Group's new apps and comply with other regulatory requirements under the Opinions on Educational Apps in a timely manner, or at all. For example, the filings of certain of our or the VIEs' educational mobile apps, such as Jixiang Jiaoyu, Shufan Jiaoyu, Zhizi Ketang, Zhizi Yunketang, Zhizi Kaoyan, Zhizi Renli, Kandian Ketang and Lexueyun have not been completed. If the Group fails to promptly complete such filing and comply with other applicable regulatory requirements, the Group may be blacklisted by the MOE or its local counterparts and prohibited from submitting any filings for six months, or may be subject to fines, regulatory orders to suspend the Group's operations or other regulatory and disciplinary sanctions.
In addition to the existing regulatory regime, it is uncertain whether and how the PRC government would promulgate additional laws and regulations regarding the online education industry, and there is no assurance that the Group can comply with any such newly promulgated laws and regulations in a timely manner, or at all. The Group's failure to fully comply with these existing and future laws and regulations may materially and adversely affect the Group's business, financial condition and results of operations.
Regulation - Risk 6
Uncertainties with respect to the PRC legal system, including uncertainties regarding the enforcement of laws, and changes in policies, laws and regulations in China, could adversely affect the Group. The enforcement of laws and rules and regulations in China may change quickly with little advance notice, which could result in a material adverse change in the Group's operations and the value of the ADSs.Changed
The PRC legal system is a civil law system based on written statutes. Unlike the common law system, prior court decisions under the civil law system may be cited for reference but have limited precedential value.
In 1979, the PRC government began to promulgate a comprehensive system of laws and regulations governing economic matters in general. The overall effect of legislation over the past three decades has significantly enhanced the protections afforded to various forms of foreign investments in China. However, the PRC legal system continues to evolve rapidly, and recently enacted laws and regulations may not sufficiently cover all aspects of economic activities in China. In particular, the interpretation and enforcement of these laws and regulations involve uncertainties and may change quickly with little advance notice, which could result in a material adverse change in the Group's operations and the value of the ADSs. Since PRC administrative and court authorities have significant discretion in interpreting and implementing statutory provisions and contractual terms, it may be difficult to evaluate the outcome of administrative and court proceedings and the level of legal protection the Group enjoys. These uncertainties may affect the Group's judgment on the relevance of legal requirements and the Group's ability to enforce contractual rights or tort claims. In addition, the regulatory uncertainties may be exploited through unmerited or frivolous legal actions or threats in attempts to extract payments or benefits from the Group.
However, as there are still regulatory uncertainties in this regard, we cannot assure you that the Group will be able to comply with new laws and regulations in all respects in a timely manner, and the Group may be ordered to rectify, suspend or terminate any actions or services that are deemed illegal by the regulatory authorities and become subject to material penalties, which may materially harm the Group's business, financial condition, results of operations and prospects.
Furthermore, the PRC legal system is based in part on government policies and internal rules, some of which are not published on a timely basis or at all and may have a retroactive effect. As a result, we may not be aware of the Group's violation of any of these policies and rules until sometime after the violation. In addition, any administrative and court proceedings in China may be protracted, resulting in substantial costs and diversion of resources and management attention.
Regulation - Risk 7
We may lose the ability to use, or otherwise benefit from, the licenses, approvals and assets held by the VIEs, which could severely disrupt the Group's business, render the Group unable to conduct some or all of the business operations and constrain the Group's growth.Changed
As part of our contractual arrangements with the VIEs, the VIEs hold certain assets, licenses and permits that are material to their business operations, such as the ICP License and the License for the Production and Operation of Radio and Television Program. The contractual arrangements contain terms that specifically obligate VIEs' shareholders to ensure the valid existence of the VIEs and restrict the disposal of material assets of the VIEs. However, in the event the VIEs' shareholders breach the terms of these contractual arrangements and voluntarily liquidate the VIEs, or the VIEs declare bankruptcy and all or part of its assets become subject to liens or rights of third-party creditors, or are otherwise disposed of without our consent, we may be unable to conduct some or all of the Group's business operations or otherwise benefit from the assets held by the VIEs, which could have a material adverse effect on the Group's business, financial condition and results of operations. Furthermore, if the VIEs undergo a voluntary or involuntary liquidation proceeding, their shareholders or unrelated third-party creditors may claim rights to some or all of the assets of the VIEs, thereby hindering the Group's ability to operate business as well as constrain the Group's growth.
Regulation - Risk 8
There are uncertainties regarding the interpretation and application of current and future PRC laws, regulations, and rules relating to the agreements that establish the VIE structure for the Group's operations in China, including potential future actions by the PRC government, which could affect the enforceability of our contractual arrangements with the VIEs and, consequently, significantly affect the Group's financial condition and results of operations. If the PRC government finds such agreements non-compliant with relevant PRC laws, regulations, and rules, or if these laws, regulations and rules or the interpretation thereof change in the future, we could be subject to severe penalties or be forced to relinquish our interests in the VIEs.Changed
Foreign investment in the value-added telecommunication services industry in China is extensively regulated and subject to numerous restrictions. Pursuant to the list of special management measures for the market entry of foreign investment, or the Negative List, published by the National Development and Reform Commission and the Ministry of Commerce on December 27, 2021 and effective on January 1, 2022, with a few exceptions, foreign investors are not allowed to own more than 50% of the equity interests in a value-added telecommunication service provider.
We are a Cayman Islands exempted company and our wholly-owned PRC subsidiaries are currently considered foreign-invested enterprise. Accordingly, our PRC subsidiaries are not eligible to provide value-added telecommunication services in China. To ensure strict compliance with the PRC laws and regulations, such business activities were conducted through the VIEs and their respective subsidiaries. Our wholly-owned subsidiaries in China have entered into a series of contractual arrangements with the VIEs, their respective shareholders and their respective subsidiaries, which enable us to (i) direct the activities of the VIEs that most significantly impact the VIEs' economic performance, (ii) receive substantially all of the economic benefits of the VIEs, and (iii) have an exclusive option to purchase all or part of the equity interests and assets in the VIEs when and to the extent permitted by PRC law. As a result of these contractual arrangements, we are considered the primary beneficiary of the VIEs for accounting purposes and are able to consolidate their operating results in the Group's financial statements under U.S. GAAP. See "Item 4. Information on the Company-4.C. Organizational Structure" for further details.
Since the laws and regulations are still evolving and new PRC laws, regulations, rules and interpretations may be introduced to impose additional requirements, posing additional challenges to our corporate structure and contractual arrangements, there are uncertainties regarding whether the Group could comply with new laws, regulations, rules and interpretations in a timely manner, or at all. Any failure to comply with such regulatory requirements may challenge the validity and enforceability of the Group's contractual arrangements.
If the PRC government finds that the Group's contractual arrangements do not comply with its restrictions on foreign investment in the value-added telecommunication services, or if the PRC government otherwise finds that we, the VIEs, or any of their subsidiaries are in violation of PRC laws or regulations or lack the necessary permits or licenses to operate the Group's business, the relevant PRC regulatory authorities, including the MIIT and SAMR, would have broad discretion in dealing with such violations or failures, including, without limitation:
- revoking the business licenses and/or operating licenses of such entities;- discontinuing or placing restrictions or onerous conditions on the Group' operation through any transactions between our PRC subsidiaries and the VIEs;- imposing fines, confiscating the income from our PRC subsidiaries or the VIEs, or imposing other requirements with which the Group may not be able to comply;- requiring the Group to restructure the Group's ownership structure or operations, including terminating the contractual arrangements with the VIEs and deregistering the equity pledges of the VIEs, which in turn would affect our ability to consolidate or derive economic interests from the VIEs; or - restricting or prohibiting our use of the proceeds of our initial public offering to finance the Group's business and operations in China.
Any of these actions could cause significant disruptions to the Group's business operations and severely damage the Group's reputation, which would in turn materially and adversely affect the Group's business, financial condition and results of operations. In addition, new PRC laws, regulations, and rules may be introduced to impose additional requirements, posing additional challenges to the Group's corporate structure and contractual arrangements. If any of these occurrences results in our inability to direct the activities of the VIEs or our failure to receive the economic benefits from the VIEs and/or our inability to claim our contractual rights over the assets of the VIEs that conduct the Group's operations in China, we may not be able to consolidate the entity in our consolidated financial statements in accordance with U.S. GAAP, which could materially and adversely affect the Group's financial condition and results of operations and cause the ADSs to significantly decline in value or become worthless.
On February 17, 2023, the CSRC released the Trial Administrative Measures of Overseas Securities Offering and Listing by Domestic Companies, or the Overseas Listing Trial Measures, and five supporting guidelines, effective on March 31, 2023. At the press conference held for the Overseas Listing Trial Measures on the same day, officials from the CSRC clarified that, as for companies seeking overseas listing with contractual arrangements, the CSRC will solicit opinions from relevant regulatory authorities and complete the filing of the overseas listing of such companies if they duly meet the compliance requirements, and support the development and growth of these companies by enabling them to utilize two markets and two kinds of resources. If the Group fails to complete the filing with the CSRC in a timely manner or at all, for any future offerings, listing or any other capital raising activities, which are subject to the filings under the Overseas Listing Trial Measures, due to the Group's contractual arrangements, our ability to raise or utilize funds could be materially and adversely affected, and we may even need to unwind the Group's contractual arrangements or restructure the Group's business operations to rectify the failure to complete the filings. However, given that the Overseas Listing Trial Measures were recently promulgated, there remain substantial uncertainties as to their interpretation, application, and enforcement and how they will affect the Group's operations and future financing.
Regulation - Risk 9
Any failure to comply with PRC regulations regarding the registration requirements for employee stock incentive plans may subject the PRC plan participants or the Group to fines and other legal or administrative sanctions.In February 2012, SAFE promulgated the Notices on Issues Concerning the Foreign Exchange Administration for Domestic Individuals Participating in Stock Incentive Plan of Overseas Publicly Listed Company, replacing earlier rules promulgated in 2007. Pursuant to these rules, PRC citizens and non-PRC citizens who reside in China for a continuous period of not less than one year who participate in any stock incentive plan of an overseas publicly listed company, subject to a few exceptions, are required to register with SAFE through a domestic qualified agent, which could be the PRC subsidiaries of such overseas-listed company, and complete certain other procedures. In addition, an overseas-entrusted institution must be retained to handle matters in connection with the exercise or sale of stock options and the purchase or sale of shares and interests. We and our executive officers and other employees who are PRC citizens or who reside in the PRC for a continuous period of not less than one year and who have been granted options will be subject to these regulations because we are an overseas-listed company. Failure to complete the SAFE registrations may subject them to fines and legal sanctions, there may be additional restrictions on the ability of them to exercise their stock options or remit proceeds gained from sale of their stock into the PRC. We also face regulatory uncertainties that could restrict our ability to adopt additional incentive plans for our directors, executive officers and employees under PRC law. See "Item 4. Information on the Company-4.B. Business Overview-Regulation-Regulations on Foreign Exchange-Regulations on Stock Incentive Plans."
Regulation - Risk 10
PRC regulations relating to the establishment of offshore special purpose companies by PRC residents may subject our PRC resident beneficial owners or our PRC subsidiaries to liabilities or penalties, limit our ability to inject capital into our PRC subsidiaries, limit our PRC subsidiaries' ability to increase their registered capital or distribute profits to us, or may otherwise adversely affect the Group.In July 2014, SAFE promulgated the Circular on Relevant Issues Concerning Foreign Exchange Control on Domestic Residents' Offshore Investment and Financing and Roundtrip Investment Through Special Purpose Vehicles, or SAFE Circular 37, to replace the Notice on Relevant Issues Concerning Foreign Exchange Administration for Domestic Residents' Financing and Roundtrip Investment Through Offshore Special Purpose Vehicles, or SAFE Circular 75, which ceased to be effective upon the promulgation of SAFE Circular 37. SAFE Circular 37 requires PRC residents (including PRC individuals and PRC corporate entities) to register with SAFE or its local branches in connection with their direct or indirect offshore investment activities. SAFE Circular 37 is applicable to our shareholders who are PRC residents and may be applicable to any offshore acquisitions that we make in the future.
Under SAFE Circular 37, PRC residents who make, or have prior to the implementation of SAFE Circular 37 made, direct or indirect investments in offshore special purpose vehicles, or SPVs, will be required to register such investments with SAFE or its local branches. In addition, any PRC resident who is a direct or indirect shareholder of an SPV is required to update its filed registration with the local branch of SAFE with respect to that SPV, to reflect any material change. Moreover, any subsidiary of such SPV in China is required to urge the PRC resident shareholders to update their registration with the local branch of SAFE. If any PRC shareholder of such SPV fails to make the required registration or to update the previously filed registration, the subsidiary of such SPV in China may be prohibited from distributing its profits or the proceeds from any capital reduction, share transfer or liquidation to the SPV, and the SPV may also be prohibited from making additional capital contributions into its subsidiary in China. On February 13, 2015, the SAFE promulgated a Notice on Further Simplifying and Improving Foreign Exchange Administration Policy on Direct Investment, or SAFE Notice 13, which became effective on June 1, 2015. Under SAFE Notice 13, applications for foreign exchange registration of inbound foreign direct investments and outbound overseas direct investments, including those required under SAFE Circular 37, will be filed with qualified banks instead of SAFE. The qualified banks will directly examine the applications and accept registrations under the supervision of SAFE. SAFE Notice 13 further provides that annual inspection of inbound foreign direct investments and outbound overseas direct investments is canceled. Instead, relevant entities or individuals, as the case may be, shall register data and information with respect to their inbound foreign direct investments and outbound overseas direct investment interests with SAFE.
We have requested our shareholders that we are aware of being subject to SAFE regulations to make all necessary registrations, filings and amendments with the local SAFE branch or qualified banks as required by SAFE Circular 37. We cannot assure you, however, that all of these individuals may continue to make required registrations, filings or updates on a timely manner, or at all. We can provide no assurance that we are or will in the future continue to be informed of identities of all PRC residents holding direct or indirect interest in our company. Any failure or inability by such individuals to comply with SAFE regulations may subject the Group to fines or legal sanctions, such as restrictions on our cross-border investment activities or our PRC subsidiary's ability to distribute dividends to, or obtain foreign exchange-denominated loans from, our company or prevent us from making distributions or paying dividends. As a result, the Group's business operations and our ability to make distributions to you could be materially and adversely affected.
Furthermore, as these foreign exchange regulations are still relatively new and their interpretation and implementation has been constantly evolving, it is unclear how these regulations, and any future regulation concerning offshore or cross-border transactions, will be interpreted, amended and implemented by the relevant government authorities. For example, the Group may be subject to a more stringent review and approval process with respect to our foreign exchange activities, such as remittance of dividends and foreign-currency-denominated borrowings, which may adversely affect the Group's financial condition and results of operations. In addition, if we decide to acquire a PRC domestic company, we cannot assure you that we or the owners of such company, as the case may be, will be able to obtain the necessary approvals or complete the necessary filings and registrations required by the foreign exchange regulations. This may restrict our ability to implement our acquisition strategy and could adversely affect the Group's business and prospects.
Regulation - Risk 11
Certain PRC regulations may make it more difficult for the Group to pursue growth through acquisitions.Among other things, the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the M&A Rules, adopted by six PRC regulatory agencies in 2006 and amended in 2009, established additional procedures and requirements that could make merger and acquisition activities by foreign investors more time-consuming and complex. Such regulation requires, among other things, that the MOFCOM be notified in advance of any change-of-control transaction in which a foreign investor acquires control of a PRC domestic enterprise or a foreign company with substantial PRC operations, if certain thresholds under the Provisions on Thresholds for Prior Notification of Concentrations of Undertakings, issued by the State Council in 2008 and recently amended in 2024, are triggered. Moreover, the Anti-Monopoly Law promulgated by the Standing Committee of the National People's Congress which became effective in 2008 and was amended in June 2022, requires that transactions which are deemed concentrations and involve parties with specified turnover thresholds must be cleared by the relevant governmental authorities before they can be completed. On February 7, 2021, the Anti-monopoly Commission of the State Council, published the Anti-Monopoly Guidelines for the Internet Platform Economy Sector that aims at specifying some of the circumstances under which an activity of internet platforms may be identified as monopolistic act as well as setting out merger controlling filing procedures involving variable interest entities. In addition, PRC national security review rules which became effective in September 2011 require acquisitions by foreign investors of PRC companies engaged in military related or certain other industries that are crucial to national security be subject to security review before consummation of any such acquisition. The Measures for the Security Review of Foreign Investments promulgated by the National Development and Reform Commission and MOFCOM which became effective from January 2021 further requires that security review by relevant governmental authorities shall be conducted in accordance with the provisions of the Measures for foreign investments that affect or may affect national security. The Group may pursue potential strategic acquisitions that are complementary to the Group's business and operations. Complying with the requirements of these regulations to complete such transactions could be time-consuming, and any required approval processes, including obtaining approval or clearance from the MOFCOM, may delay or inhibit the Group's ability to complete such transactions, which could affect the Group's ability to expand the Group's business or maintain the Group's market share.
Regulation - Risk 12
Our contractual arrangements are governed by PRC laws. Accordingly, these contracts would be interpreted in accordance with PRC laws, and any disputes would be resolved in accordance with PRC legal procedures.The legal system in the PRC is not as developed as in some other jurisdictions, such as the United States. As a result, uncertainties in the PRC legal system could limit our ability to enforce these contractual arrangements. Meanwhile, there are very few precedents and little formal guidance as to how contractual arrangements in the context of a VIE should be interpreted or enforced under PRC laws. There remain significant uncertainties regarding the ultimate outcome of such arbitration should legal action become necessary. In addition, under PRC law, rulings by arbitrators are final, parties cannot appeal the arbitration results in courts, and if the losing parties fail to carry out the arbitration awards within a prescribed time limit, the prevailing parties may only enforce the arbitration awards in PRC courts, which would require additional expenses and delay. In the event we are unable to enforce these contractual arrangements, or if we suffer significant delays or other obstacles in the process of enforcing these contractual arrangements, we may not be considered as the primary beneficiary of the VIEs for accounting purposes, and the Group's ability to conduct business may be negatively affected.
Regulation - Risk 13
The approval, filing or other requirements of the China Securities Regulatory Commission or other PRC government authorities may be required under PRC law in connection with our issuance of securities overseas, and if required, we cannot predict whether or for how long the Group will be able to obtain such approval or complete such filing or other requirements.The Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the M&A Rules, purport to require offshore special purpose vehicles that are controlled by PRC companies or individuals and that acquire PRC domestic companies or assets by using such offshore special purpose vehicles' shares as a means of payment for the purpose of seeking a public listing on an overseas stock exchange, to obtain CSRC approval prior to publicly listing their securities on an overseas stock exchange. The interpretation and application of the regulations remain unclear. If CSRC approval under the M&A Rules is required, it is uncertain whether it would be possible for the Group to obtain the approval, and any failure to obtain or delay in obtaining CSRC approval for our future issuance of securities overseas would subject the Group to sanctions imposed by the CSRC and other PRC regulatory agencies.
Furthermore, the Opinions on Strictly Cracking Down on Illegal Securities Activities emphasized the need to strengthen the administration over "illegal securities activities" and the supervision on overseas listings by China-based companies, and proposed to take effective measures, such as promoting the construction of relevant regulatory systems to deal with the risks and incidents faced by China-based overseas-listed companies, although such opinions did not specify the definition of "illegal securities activities." Such opinions further provided that the special provisions of the State Council on overseas offerings and listings by those companies limited by shares will be revised and therefore the duties of domestic industry competent authorities and regulatory agencies will be clarified.
On February 17, 2023, the CSRC released the Overseas Listing Trial Measures, and five supporting guidelines, effective on March 31, 2023. Pursuant to the Overseas Listing Trial Measures, domestic companies that seek to offer or list securities overseas, either in direct or indirect means, are required to report and file required documents with the CSRC. In addition, domestic companies that have been listed on a foreign stock exchange prior to the effective date of the Overseas Listing Trial Measures are required to file with the CSRC within three working days of the completion of fund raising activities on the same overseas capital market and shall make required filing immediately after they submit application for their listing or offering securities in other overseas capital markets. If a domestic company fails to complete the filing procedure or conceals any material fact or falsifies any major content in its filing documents, such domestic company may be subject to administrative penalties, such as order to rectify, warnings, fines, and its controlling shareholders, actual controllers, the person directly in charge and other directly liable persons may also be subject to administrative penalties, such as warnings and fines. See "Item 4. Information on the Company-4.B. Business Overview-Regulation-M&A Regulations and Overseas Listings." However, since the Overseas Listing Trial Measures was newly promulgated, the interpretation, application and enforcement of Overseas Listing Trial Measures remain unclear. We cannot assure you that we could complete the filing procedure in relation to any further capital raising activities as required in a timely manner, or at all. The CSRC or other PRC regulatory agencies also may take further actions requiring the Group, or making it advisable for the Group, not to proceed with such offering or maintain the listing status of the ADSs. If we proceed with any of such offering or maintain the listing status of the ADSs without obtaining the CSRC's approval to the extent it is required, or if the Group is unable to comply with any new approval or filing requirements which might be adopted for offerings that we have completed prior to the effective date of the Overseas Listing Trial Measures, the Group may face regulatory actions or other sanctions from the CSRC or other PRC regulatory agencies. These regulatory agencies may impose fines and penalties on the Group's operations in China, limit the Group's ability to pay dividends outside of China, limit the Group's operating privileges in China, delay or restrict the repatriation of the proceeds from offering of securities overseas into China or take other actions that could have a material adverse effect on the Group's business, financial condition, results of operations and prospects, as well as the trading price of the ADSs.
Furthermore, if there are any other approvals, filings and/or other administration procedures to be obtained from or completed with the CSRC or other PRC regulatory agencies as required by any new laws and regulations for any of our future proposed offering of securities overseas or the listing of the ADSs, we cannot assure you that the Group can obtain the required approval or complete the required filings or other regulatory procedures in a timely manner, or at all. Any failure to obtain the relevant approvals or complete the filings and other relevant regulatory procedures may subject the Group to regulatory actions or other sanctions from the CSRC or other PRC regulatory agencies, which may have a material adverse effect on the Group's business, financial condition or results of operations.
Regulation - Risk 14
It may be difficult for overseas regulators to conduct investigation or collect evidence within China.Shareholder claims or regulatory investigation that are common in the United States generally are difficult to pursue as a matter of law or practicality in China. For example, in China, there are significant legal and other obstacles to providing information needed for regulatory investigations or litigation initiated outside China. Although the authorities in China may establish a regulatory cooperation mechanism with the securities regulatory authorities of another country or region to implement cross-border supervision and administration, such cooperation with the securities regulatory authorities in the Unities States may not be efficient in the absence of mutual and practical cooperation mechanism. Furthermore, Article 177 of the PRC Securities Law, or Article 177, which became effective in March 2020, prohibits, without the approval of the securities regulatory authority in China, (i) foreign securities regulators from engaging in any inspection activities within China and (ii) anyone from providing any documents or materials relating to capital markets activities to foreign parties. While detailed interpretation of or implementation rules under Article 177 have yet to be promulgated, the inability for an overseas securities regulator to directly conduct investigation or evidence collection activities within China may further increase difficulties faced by you in protecting your interests. In addition, the Overseas Listing Trial Measures provides, among others, that domestic companies or individuals shall obtain the consent from the CSRC and relevant competent departments, if they provide relevant documents and materials in accordance with the requirements of overseas securities regulators for investigation and collection of evidence. However, since the Overseas Listing Trial Measures was newly promulgated, the interpretation, application and enforcement of Overseas Listing Trial Measures remain unclear. If the Group is required to obtain the consent from the CSRC and relevant competent departments when providing information needed for regulatory investigations or litigation initiated outside China, it is uncertain whether the Group could obtain such consent in a timely manner, or at all. See also "-Risks Related to the ADSs-You may face difficulties in protecting your interests, and your ability to protect your rights through U.S. courts may be limited, because we are incorporated under Cayman Islands law" for risks associated with investing in us as a Cayman Islands company.
Regulation - Risk 15
Uncertainties exist with respect to the interpretation and implementation of the newly enacted Foreign Investment Law and how it may impact the Group's business, financial condition and results of operations.On March 15, 2019, the National People's Congress promulgated the Foreign Investment Law, which came into effect on January 1, 2020 and replaced the trio of existing laws regulating foreign investment in China, namely, the Sino-foreign Equity Joint Venture Enterprise Law, the Sino-foreign Cooperative Joint Venture Enterprise Law and the Wholly
Foreign-invested Enterprise Law, together with their implementation rules and ancillary regulations. The Foreign Investment Law embodies an expected PRC regulatory trend to rationalize its foreign investment regulatory regime in line with prevailing international practice and the legislative efforts to unify the corporate legal requirements for both foreign and domestic investments. The enacted Foreign Investment Law does not touch upon the relevant concepts and regulatory regimes of "actual control" in determining whether a company is considered a foreign invested enterprise, and thus this regulatory topic remains unclear under the Foreign Investment Law. On December 26, 2019, the State Council published the Implementation Rules of Foreign Investment Law, which came into effect on January 1, 2020. The Implementation Rules of Foreign Investment Law restates certain principles of the Foreign Investment Law. However, since the Foreign Investment Law and the Implementation Rules of Foreign Investment Law are relatively new, uncertainties still exist in relation to its interpretation and implementation. For instance, though the Foreign Investment Law does not explicitly classify contractual arrangements as a form of foreign investment, it contains a catch-all provision under the definition of "foreign investment," which includes investments made by foreign investors in China through means stipulated in laws or administrative regulations or other methods prescribed by the State Council. Therefore, it still leaves leeway for future laws, administrative regulations or provisions promulgated by the State Council to provide for contractual arrangements as a form of foreign investment. Furthermore, if future laws, administrative regulations or provisions prescribed by the State Council mandate further actions to be taken by companies with respect to existing contractual arrangements, such as unwinding the Group's existing contractual arrangements and/or disposal of the Group's related business operations, the Group may face uncertainties as to whether the Group can complete such actions in a timely manner, or at all. Failure to take timely and appropriate measures to cope with any of these or similar regulatory compliance challenges could materially and adversely affect the Group's current corporate structure, financial condition and business operations.
Regulation - Risk 16
You may be subject to limitations on the transfer of your ADSs.Your ADSs are transferable on the books of the depositary. However, the depositary may close its books at any time or from time to time when it deems it expedient in connection with the performance of its duties. The depositary may close its books in emergencies, and on weekends and public holidays. The depositary may refuse to deliver, transfer or register transfers of the ADSs generally when our share register or the books of the depositary are closed, or at any time if we or the depositary thinks it is advisable to do so because of any requirement of law or of any government or governmental body, or under any provision of the deposit agreement, or for any other reason.
Litigation & Legal Liabilities3 | 3.4%
Litigation & Legal Liabilities - Risk 1
You may experience difficulties in effecting service of legal process, enforcing foreign judgments or bringing actions in China, including Hong Kong, against the Group or the Group's management named in the annual report based on foreign laws.Litigation & Legal Liabilities - Risk 2
The Group may be subject to litigations, allegations, complaints and investigations from time to time arising out of business operations. We and certain of our directors and officers have been named as defendants in a shareholder class action lawsuit, which could have a material adverse impact on the Group's business, financial condition, results of operation, cash flows and reputation.The Group has been and may continue to be involved in legal and other disputes in the ordinary course of business operations. For example, we and certain of our directors and officers have been named as defendants in a class action lawsuit. For details, see "Item 8. Financial Information-8.A. Consolidated Statements and Other Financial Information-Legal Proceedings." We cannot guarantee that the Group will not be a target for lawsuits in the future, including putative class action lawsuits brought by shareholders. There can be no assurance that the Group will be able to prevail in the Group's defense or reverse any unfavorable judgment on appeal, and the Group may decide to settle lawsuits on unfavorable terms. Any adverse outcome of these cases, including any plaintiffs' appeal of the judgment in these cases, could result in payments of substantial monetary damages or fines, or changes to the Group's business practices, and thus have a material adverse effect on the Group's business, financial condition, results of operation, cash flows and reputation. In addition, there can be no assurance that the Group's insurance carriers will cover all or part of the defense costs, or any liabilities that may arise from these matters. The litigation process may utilize a significant portion of the Group's cash resources and divert management's attention from the day-to-day operations of our company, all of which could harm the Group's business. The Group also may be subject to claims for indemnification related to these matters, and the Group cannot predict the impact that indemnification claims may have on the Group's business or financial results.
Litigation & Legal Liabilities - Risk 3
We cannot assure you that the Group will not be subject to liability claims or legal or regulatory liability for any inappropriate or illegal content, which could subject the Group to liabilities and cause damages to the Group's reputation.Although the Group implements various monitoring procedures to identify and remove inappropriate or illegal content, we cannot assure you that there will be no inappropriate or illegal content included in the Group's content offerings including content generated and uploaded to the Group's online platforms by the users. For example, the Group has been historically penalized for inaccurate advertising. The Group may face civil, administrative or criminal liability or legal or regulatory sanctions, such as requiring the Group to restrict or discontinue the Group's content, products or services, if an individual or corporate, governmental or other entity believes that any of the content offerings violates any laws, regulations or governmental policies or infringes upon its legal rights. Even if such a claim were not successful, defending such a claim may cause the Group to incur substantial costs. Moreover, any accusation of inappropriate or illegal content in the Group's content offerings could lead to significant negative publicity, which could harm the Group's reputation, business, financial condition and results of operations.
Taxation & Government Incentives4 | 4.6%
Taxation & Government Incentives - Risk 1
We have granted, and may continue to grant, share incentives, which may result in increased share-based compensation expenses.Taxation & Government Incentives - Risk 2
If we are classified as a PRC resident enterprise for PRC enterprise income tax purposes, such classification could result in unfavorable tax consequences to the Group and our non-PRC shareholders and ADS holders.Under the PRC Enterprise Income Tax Law and its implementation rules, an enterprise established outside of the PRC with its "de facto management body" within the PRC is considered a "resident enterprise" and will be subject to the enterprise income tax on its global income at the rate of 25%. The implementation rules define the term "de facto management body" as the body that exercises full and substantial control and overall management over the business, productions, personnel, accounts and properties of an enterprise. In 2009, the State Administration of Taxation, or SAT, issued a circular, known as SAT Circular 82, which provides certain specific criteria for determining whether the "de facto management body" of a PRC-controlled enterprise that is incorporated offshore is located in China. Although this circular only applies to offshore enterprises controlled by PRC enterprises or PRC enterprise groups, not those controlled by PRC individuals or foreigners, the criteria set forth in the circular may reflect the SAT's general position on how the "de facto management body" text should be applied in determining the tax resident status of all offshore enterprises. According to SAT Circular 82, an offshore incorporated enterprise controlled by a PRC enterprise or a PRC enterprise group will be regarded as a PRC tax resident by virtue of having its "de facto management body" in China, and will be subject to PRC enterprise income tax on its global income only if all of the following conditions are met: (i) the primary location of the day-to-day operational management is in the PRC; (ii) decisions relating to the enterprise's financial and human resource matters are made or are subject to approval by organizations or personnel in the PRC; (iii) the enterprise's primary assets, accounting books and records, company seals, and board and shareholder resolutions are located or maintained in the PRC; and (iv) at least 50% of voting board members or senior executives habitually reside in the PRC.
We believe our company is not a PRC resident enterprise for PRC tax purposes. However, the tax resident status of an enterprise is subject to determination by the PRC tax authorities and uncertainties remain with respect to the interpretation of the term "de facto management body." If the PRC tax authorities determine that our company is a PRC resident enterprise for enterprise income tax purposes, we will be subject to PRC enterprise income on our worldwide income at the rate of 25%. Furthermore, we be required to withhold a 10% withholding tax from dividends we pay to our shareholders that are non-resident enterprises, including the holders of the ADSs. In addition, non-resident enterprise shareholders (including the ADS holders) may be subject to PRC tax on gains realized on the sale or other disposition of ADSs or ordinary shares, if such income is treated as sourced from within the PRC. Furthermore, if we are deemed a PRC resident enterprise, dividends paid to our non-PRC individual shareholders (including the ADS holders) and any gain realized on the transfer of ADSs or ordinary shares by such shareholders may be subject to PRC tax at a rate of 20% (which, in the case of dividends, may be withheld at source by us). These rates may be reduced by an applicable tax treaty, but it is unclear whether non-PRC shareholders of our company would be able to claim the benefits of any tax treaties between their country of tax residence and the PRC in the event that we are treated as a PRC resident enterprise. Any such tax may reduce the returns on your investment in the ADSs or ordinary shares.
Taxation & Government Incentives - Risk 3
Contractual arrangements in relation to the VIEs may be subject to scrutiny by the PRC tax authorities and they may determine that the Group owes additional taxes, which could negatively affect the Group's financial condition and the value of your investment.Under applicable PRC laws and regulations, arrangements and transactions among related parties may be subject to audit or challenge by the PRC tax authorities within ten years after the taxable year when the transactions are conducted. The Group could face material and adverse tax consequences if the PRC tax authorities determine that the VIE contractual arrangements were not entered into on an arm's-length basis in such a way as to result in an impermissible reduction in taxes under applicable PRC laws, rules and regulations, and adjust the income of the VIEs in the form of a transfer pricing adjustment. A transfer pricing adjustment could, among other things, result in a reduction of expense deductions recorded by the VIEs for PRC tax purposes, which could in turn increase tax liabilities without reducing our PRC subsidiary's tax expenses. In addition, the PRC tax authorities may impose late payment fees and other penalties on the VIEs for the adjusted but unpaid taxes according to the applicable regulations. The Group's financial position could be materially and adversely affected if the VIEs' tax liabilities increase or if it is required to pay late payment fees and other penalties.
Taxation & Government Incentives - Risk 4
The Group may face risks associated with the installment tuition payment plan the Group offers to its students.Added
In 2015, the Group launched an installment payment option enabling eligible students to obtain loans from accredited third-party credit providers in China to finance all or part of their tuition. The third-party credit providers are responsible for performing credit assessment, approving loan applications, providing the funds, and collecting delinquent loan payments. Under the loan agreement between the borrowing student and the lending credit provider, the borrowing student is obligated to repay the loan principal in installments over a period ranging from 3 to 12 months. Under the cooperation agreement between the Group and each credit provider, the Group is obligated to pay the full amount of interest payable under a loan to the credit providers. The Group does not provide any guarantees for the repayment of student loans in favor of the credit providers. In 2021, 2022 and 2023, the Group's student loan coverage ratio was 24.8%, 5.1% and 1.3%, respectively. For the same periods, the Group made interest payments of RMB36.9 million, RMB6.0 million and RMB1.5 million (US$0.2 million), respectively, to the credit providers. The decrease was mainly due to the students' preference for lump-sum payment for interest, professional skills and professional certification preparation courses.
However, the Group plans to continue to make the interest payments for students under their loans and pay service fees to the credit providers, which may place strains on the Group's financial resources in the future. The Group may be subject to risks associated with an increase in interest rates to the extent that the Group continues to make interest payments for the loans taken by students. If the Group ceases to do so due to increases in interest rates or for other reasons, the Group's course packages may become more costly for students to purchase, which could in turn negatively impact the Group's business, financial condition and reputation.
The availability of funding from the Group's existing and potential credit providers depends on many factors, such as their liquidity and capital sufficiency, the legal and regulatory environment, the general economic conditions, default rates of students on the loans, and, where applicable, the availability of lenders on the credit providers' platforms. In addition, the Group's credit providers may seek to acquire borrowers independently instead of through cooperation with us. The Group currently works with a limited number of credit providers and we cannot assure you that the Group's credit providers will continue to cooperate with the Group on commercially favorable terms, or at all, or that existing or potential credit providers will be able to provide loans in a sufficient amount to meet students' borrowing needs. If any of these were to occur, the Group's course packages may become less compelling to prospective students who wish to obtain student loans, and as a result the Group's business and financial condition may be negatively affected.
Environmental / Social3 | 3.4%
Environmental / Social - Risk 1
The Group is subject to a variety of laws and other obligations regarding data protection, and any failure to comply with applicable laws and obligations could have a material adverse effect on the Group's business, financial condition and results of operations.Environmental / Social - Risk 2
Privacy concerns could limit the Group's ability to collect and leverage the Group's user data and disclosure of user data could adversely impact the Group's business and reputation.In the ordinary course of the Group's business and in particular in connection with conducting sales and marketing activities with the Group's existing and prospective students as well as the utilization of the Group's AI-powered personalized study programs, the Group collects and utilizes data supplied by the users. The Group currently faces certain legal obligations regarding the manner in which the Group treats such information. Increased regulation of data utilization practices, including self-regulation or findings under existing laws that limit the Group's ability to collect, transfer and use data, could have an adverse effect on the Group's business. While we have security measures in place to protect the data of the Group's users, the Group's study programs and underlying infrastructure may be materially damaged or compromised as a result of various factors, such as efforts by individuals or groups of hackers and sophisticated organizations, cyberattacks on the Group's internally built infrastructure, and vulnerabilities in systems and applications from third-party service providers. In addition, if the Group were to disclose data about the Group's users in a manner that was objectionable to them, the Group's business reputation could be adversely affected, and the Group could face potential legal claims and administrative penalties that could impact the Group's operating results. For further details, see "Item 4. Information on the Company-4.B. Business Overview-Data Privacy and Security" and "Item 16.K. Cybersecurity."
Internationally, the Group may become subject to additional and/or more stringent legal obligations concerning the Group's treatment of customer and other personal information, such as laws regarding data localization and/or restrictions on data export. Failure to comply with these obligations could subject the Group to liability, and to the extent that the Group need to alter the Group's business model or practices to adapt to these obligations, the Group could incur additional expenses.
Environmental / Social - Risk 3
Regulation and censorship of information disseminated over the internet in China may adversely affect the Group's business and reputation and subject the Group to liability for information displayed on our website.Changed
The PRC government has adopted regulations governing internet access and the distribution of news and other information over the internet. Under these regulations, internet content providers and internet publishers are prohibited from posting or displaying over the internet content that, among other things, violates PRC laws and regulations, impairs the national dignity of China, or is reactionary, obscene, superstitious, fraudulent or defamatory. Failure to comply with these requirements may result in the revocation of licenses to provide internet content and other licenses, and the closure of the concerned websites. The website operator may also be held liable for such censored information displayed on or linked to the websites. If the Group's website is found to be in violation of any such requirements, the Group may be penalized by relevant authorities, and the Group's operations or reputation could be adversely affected.
Production
Total Risks: 14/87 (16%)Above Sector Average
Employment / Personnel6 | 6.9%
Employment / Personnel - Risk 1
Students may decide not to continue taking the Group's courses for a number of reasons, including a perceived lack of improvement in their academic performance or general dissatisfaction with the Group's course and educational content offerings, which may adversely affect the Group's business, financial condition, results of operations and reputation.Employment / Personnel - Risk 2
The Group's students, employees and third-party vendors may engage in intentional or negligent misconduct or other improper activities or misuse the Group's platform, which could harm the Group's brand and reputation.Changed
The Group is exposed to the risk of fraud or other misconducts committed by students, employees and vendors, including certain third-party sales and marketing agencies. For example, in some instances, students and faculty members may post to the Group's platform articles or other third-party content for use in class discussions. The PRC laws governing the fair use of these third-party materials are imprecise and adjudicated on a case-by-case basis, which makes it challenging for the Group to adopt and implement policies governing these practices. The Group could, as a result, incur liability to third parties for the unauthorized duplication, distribution or other use of these materials. Any such claims could subject the Group to costly litigation and impose a significant strain on the Group's financial resources and attention of management personnel regardless of whether the claims have merit. The Group may be required to alter or cease the Group's uses of such materials, which may include changing or removing content from courses or altering the functionality of the Group's platform, or to pay monetary damages. Fraud or other misconducts by students, employees or third parties may also involve engaging in unauthorized misrepresentation to the Group's potential students and misappropriating third-party intellectual property and other propitiatory rights during marketing activities, misusing sensitive personal information of students, and engaging in bribery or other unlawful payments, any of which could result in customer complaints, regulatory and legal liabilities, as well as serious harm to the Group's brand and reputation.
The Group's courses undergo multiple rounds of internal review before being broadly released. While the Group proactively monitors the live courses and other content and communications to ensure that the Group is able to identify content that may be deemed inappropriate or in violation of laws, regulations and government policies, since the Group has limited control over the real-time and offline behavior of the Group's users and employees, to the extent any improper behavior is associated with the Group's content and services, the Group's ability to protect its reputation may be limited. If any of the Group's users and employees suffer or allege to have suffered harm following contact initiated through the Group's services, the Group may face civil lawsuits or other liabilities. In response to allegations of illegal or inappropriate activities, PRC government authorities may intervene and hold the Group liable for non-compliance with PRC laws and regulations concerning the dissemination of information on the internet and subject the Group to administrative penalties or other sanctions, such as requiring the Group to restrict or discontinue the Group's content or services. As a result, the Group's business may suffer and the Group's reputation, business, financial condition and results of operations may be materially and adversely affected.
Employment / Personnel - Risk 3
Increases in labor costs in the PRC may adversely affect the Group's business and results of operations.The currently effective PRC Labor Contract Law was first adopted on June 29, 2007 and later amended on December 28, 2012. The PRC Labor Contract Law has reinforced the protection of employees who, under the PRC Labor Contract Law, have the right, among others, to have written employment contracts, to enter into employment contracts with no fixed term under certain circumstances, to receive overtime wages and to terminate or alter terms in labor contracts. Furthermore, the PRC Labor Contract Law sets forth additional restrictions and increases the costs involved with dismissing employees. To the extent that the Group needs to significantly reduce the Group's workforce, the PRC Labor Contract Law could adversely affect the Group's ability to do so in a timely and cost-effective manner, and the Group's results of operations could be adversely affected. In addition, for employees whose employment contracts include noncompetition terms, the PRC Labor Contract Law requires the Group to pay monthly compensation after such employment is terminated, which will increase the Group's operating expenses.
In addition, the Group is required by PRC laws and regulations to make social insurance registration and open housing fund account with relevant governmental authorities and pay various statutory employee benefits, including pensions, housing fund, medical insurance, work-related injury insurance, unemployment insurance and maternity insurance to designated government agencies for the benefit of the Group's employees. The relevant government agencies may examine whether an employer has made adequate payments of the requisite statutory employee benefits, and those employers who fail to make adequate payments may be subject to late payment fees, fines and/or other penalties. If the Group fails to make adequate social insurance and housing fund contributions, the Group may be subject to fines and legal sanctions, and the Group's business, financial condition and results of operations may be adversely affected. We expect that the Group's labor costs, including wages and employee benefits, will continue to increase. Unless the Group is able to pass on these increased labor costs to the Group's customers by increasing the prices of the Group's products and services, the Group's financial conditions and results of operations would be materially and adversely affected.
Employment / Personnel - Risk 4
If the Group fails to make adequate contributions to various employee benefits plans as required by PRC regulations, the Group may be subject to penalties.Companies operating in China are required to participate in various government-sponsored employee benefit plans, including certain social insurance, housing funds and other welfare-oriented payment obligations, and contribute to the plans in amounts equal to certain percentages of salaries, including bonuses and allowances, of employees up to a maximum amount specified by the local government from time to time at locations where the Group's employees are based. The requirement of employee benefit plans has not been implemented consistently by the local governments in China given the different levels of economic development in different locations. If the Group fails to make adequate contributions to various employee benefit plans and comply with applicable PRC labor-related laws, the Group may be subject to late payment penalties, and the Group could be required to make up the contributions for these plans as well as to pay late fees and fines. If the Group is subject to late fees or fines in relation to the underpaid employee benefits, the Group's financial condition and results of operations may be adversely affected. In addition, to the extent that the Group can make a reasonable estimate of the liability arising from the Group's failure in making full contributions to various employee benefit plans, the Group will record a related contingent liability. However, the amount of the Group's estimates may be inaccurate, in which case the Group's financial condition and cash flow may be adversely affected if the Group were to pay late fees or fines in relation to the underpaid employee benefits.
Employment / Personnel - Risk 5
The Group's success depends on the continuing efforts of the Group's senior management team and other key employees.Added
The Group depends on the continued contributions of our senior management and other key employees, including, in particular, Mr. Jianhong Yin, also known as Peng Ou, our founder and the chairman of our board of directors, and Mr. Tongbo Liu, our director and Chief Executive Officer. The loss of the services of any of the Group's senior management or other key employees could harm the Group's business. Competition for qualified talents in China is intense. If one or more of the Group's senior management or other key employees are unable or unwilling to continue in their present positions, the Group may not be able to find replacements in a timely manner, or at all, and the Group's business may be disrupted. Moreover, if any member of the Group's senior management team or any of the Group's other key personnel joins a competitor or forms or invests in a competing business, the Group may lose student enrollments, qualified teaching faculty members and other key sales and marketing personnel to the Group's competitors. The Group's future success is also dependent on the Group's ability to attract a significant number of qualified employees and retain existing key employees. If the Group is unable to do so, the Group's business and growth may be materially and adversely affected.
The Group's need to significantly increase the number of qualified employees and retain key employees may cause the Group to materially increase compensation-related costs, including share-based compensation.
Employment / Personnel - Risk 6
The Group may not be able to continue to recruit, train and retain a sufficient number of qualified faculty members.Added
The Group's faculty members are key to the quality of the Group's educational services, as well as the Group's brand and reputation. The Group's ability to continue to attract faculty members, including teachers and mentors, with necessary experience and qualifications is a key driver in the success of the Group's business. The Group seeks to recruit qualified faculty members who are dedicated to teaching and are able to communicate with students in an interactive online setting.
Additionally, given the interactive nature of the Group's live streaming lessons, the Group tends to hire teachers and mentors with strong education background and good communication skills enabling them to engage and interact with students. The market for recruitment of faculty members in China is competitive. In order to recruit qualified full-time teachers and mentors, the Group must provide candidates with competitive compensation packages and offer attractive career development opportunities. Although the Group has not experienced major difficulties in recruiting or training qualified teachers and mentors in the past, we cannot guarantee the Group will be able to continue to recruit, train and retain a sufficient number of qualified faculty members in the future as the Group continues to expand course offerings and business scale, which may have a material adverse effect on the Group's business, financial condition and results of operations.
Supply Chain4 | 4.6%
Supply Chain - Risk 1
The Group is subject to the risks associated with third-party live streaming service providers.Added
Supply Chain - Risk 2
The Group may be the subject of detrimental conduct by third parties such as the Group's competitors, including complaints to regulatory agencies and the public dissemination of malicious assessments of the Group's business, which could have a negative impact on the Group's reputation and cause the Group to lose market share, students and revenues, and adversely affect the price of the ADSs.The Group has been, and in the future may be, the target of anti-competitive, harassing or other detrimental conduct by third parties including the Group's competitors. Such conduct may include complaints, anonymous or otherwise, to regulatory agencies regarding the Group's operations, accounting, business relationships, business prospects and business ethics. Additionally, allegations, directly or indirectly against the Group, may be posted online by anyone, whether or not related to the Group, on an anonymous basis. The Group may be subject to government or regulatory investigation as a result of such third-party conduct and may be required to expend significant time and incur substantial costs to address such third-party conduct, and there is no assurance that the Group will be able to conclusively refute each of the allegations within a reasonable period of time, or at all. The Group's reputation may also be materially negatively affected as a result of the public dissemination of anonymous allegations or malicious statements about the Group's business, which in turn may cause the Group to lose students and revenues, and adversely affect the price of the ADSs.
Supply Chain - Risk 3
We rely on contractual arrangements with the VIEs and their respective shareholders for a significant portion of the Group's business operations which may not be as effective as direct ownership.We have relied and expect to continue to rely on contractual arrangements with the VIEs, their respective shareholders and their respective subsidiaries to operate the Group's online education services business in China. These contractual arrangements may not be as effective as direct ownership. For example, the VIEs and their respective shareholders could breach their contractual arrangements with us by, among other things, failing to conduct their operations in an acceptable manner or taking other actions that are detrimental to our interests. The revenues contributed by the VIEs and their respective subsidiaries constituted 21.4%, 46.3% and 63.4% of the Group's total net revenues in 2021, 2022 and 2023, respectively.
If we had direct ownership of the VIEs, we would be able to exercise our rights as a shareholder to effect changes in the board of directors of the VIEs, which in turn could implement changes, subject to any applicable fiduciary obligations, at the management and operational level. However, under the current contractual arrangements, we rely on the performance by the VIEs and their respective shareholders of their obligations under the contracts. The shareholders of the VIEs may not act in the best interests of our company or may not perform their obligations under these contracts. Such risks exist throughout the period in which we intend to operate certain portions of the Group's business through the contractual arrangements with the VIEs. If any disputes relating to these contracts remain unresolved, we will have to enforce our rights under these contracts through the operations of PRC law and arbitration, litigation and other legal proceedings and therefore will be subject to uncertainties in the PRC legal system. Therefore, our contractual arrangements with the VIEs may not be as effective as direct ownership would be.
Supply Chain - Risk 4
Techniques employed by short sellers may drive down the market price of the ADSs.Short selling is the practice of selling securities that the seller does not own but rather has borrowed from a third party with the intention of buying identical securities back at a later date to return to the lender. The short seller hopes to profit from a decline in the value of the securities between the sale of the borrowed securities and the purchase of the replacement shares, as the short seller expects to pay less in that purchase than it received in the sale. As it is in the short seller's interest for the price of the security to decline, many short sellers publish, or arrange for the publication of, negative opinions regarding the relevant issuer and its business prospects in order to create negative market momentum and generate profits for themselves after selling a security short. These short attacks have, in the past, led to selling of shares in the market.
Public companies that have substantially all of their operations in China have been the subject of short selling. Much of the scrutiny and negative publicity has centered on allegations of a lack of effective internal control over financial reporting resulting in financial and accounting irregularities and mistakes, inadequate corporate governance policies or a lack of adherence thereto and, in many cases, allegations of fraud. As a result, many of these companies are now conducting internal and external investigations into the allegations and, in the interim, are subject to shareholder lawsuits and/or enforcement actions by the SEC or other U.S. authorities.
It is not clear what effect such negative publicity could have on us. If we were to become the subject of any unfavorable allegations, whether such allegations are proven to be true or untrue, we could have to expend a significant amount of resources to investigate such allegations and/or defend ourselves. While we would strongly defend against any such short seller attacks, we may be constrained in the manner in which we can proceed against the relevant short seller by principles of freedom of speech, applicable state law or issues of commercial confidentiality. Such a situation could be costly and time-consuming, and could distract our management from growing the Group's business. Even if such allegations are ultimately proven to be groundless, allegations against the Group could severely impact the Group's business operations, and any investment in the ADSs could be greatly reduced or even rendered worthless.
Costs4 | 4.6%
Costs - Risk 1
The Group currently does not have any business insurance coverage.Costs - Risk 2
The Group faces certain risks relating to the real properties that the Group leases.The Group leases real properties from third parties primarily for the Group's office use in China, and the lease agreements for most of these leased properties have not been registered with the PRC governmental authorities as required by PRC law. Although the failure to do so does not in itself invalidate the leases, the Group may be ordered by the PRC government authorities to rectify such noncompliance and, if such noncompliance were not rectified within a given period of time, the Group may be subject to fines imposed by PRC government authorities ranging from RMB1,000 and RMB10,000 for the Group's lease agreements that have not been registered with the relevant PRC governmental authorities.
As of the date of this annual report, the Group is not aware of any regulatory or governmental actions, claims or investigations being contemplated or any challenges by third parties to the Group's use of the Group's leased properties the lease agreements of which have not been registered with the government authorities. However, we cannot assure you that the government authorities will not impose fines on the Group due to the Group's failure to register any of the Group's lease agreements, which may negatively impact the Group's financial condition.
The Group leases real properties from third parties in China for marketing and providing offline consultation related to the Group's online services for potential students or existing students. Some of the ownership certificates or other similar proof of certain leased properties have not been provided to the Group by the relevant lessors. Therefore, we cannot assure you that such lessors are entitled to lease the relevant real properties to us. If the lessors are not entitled to lease the real properties to the Group and the owners of such real properties decline to ratify the lease agreements between the Group and the respective lessors, the Group may not be able to enforce the Group's rights to lease such properties under the respective lease agreements against the owners. As of the date of this annual report, the Group is not aware of any claim or challenge brought by any third parties concerning the use of the Group's leased properties without obtaining proper ownership proof. If the Group's lease agreements are claimed as null and void by third parties who are the real owners of such leased real properties, the Group could be required to vacate the properties, in the event of which the Group could only initiate the claim against the lessors under relevant lease agreements for indemnities for their breach of the relevant leasing agreements. We cannot assure you that suitable alternative locations are readily available on commercially reasonable terms, or at all, and if the Group is unable to relocate the Group's operations in a timely manner, the Group's operations may be interrupted.
Costs - Risk 3
We have incurred increased costs as a result of being a public company, particularly after we ceased to qualify as an "emerging growth company."Changed
We are a public company and expect to continue to incur significant legal, accounting and other expenses that we did not incur as a private company. The Sarbanes-Oxley Act of 2002, as well as rules subsequently implemented by the U.S. Securities and Exchange Commission, or the SEC, and the NYSE, impose various requirements on the corporate governance practices of public companies. We will incur additional costs associated with our public company reporting requirements. It may also be more difficult for the Group to find qualified persons to serve on our board of directors or as executive officers. In addition, as we have ceased to be an "emerging growth company" as such term is defined in the JOBS Act, we expect to incur significant expenses and devote substantial management effort toward ensuring compliance with the requirements of Section 404 and the other rules and regulations of the SEC. We are currently evaluating and monitoring developments with respect to these rules and regulations, and we cannot predict or estimate with any degree of certainty the amount of additional costs we may incur or the timing of such costs.
Costs - Risk 4
If the market price for the ADSs falls below US$1.00 for an extended period of time, or falls to US$0.16 at any time, the ADSs may be delisted from the NYSE.Changed
Pursuant to NYSE Rule 802.01C, a company will be considered to be below compliance standards if the average closing price of a security as reported on the consolidated tape is less than US$1.00 over a consecutive 30 trading-day period. Once notified, the company must bring its share price and average share price back above US$1.00 within the applicable cure period following receipt of the notification. The company can regain compliance at any time during the cure period if on the last trading day of any calendar month during the cure period the company has a closing share price of at least US$1.00 and an average closing share price of at least US$1.00 over the 30 trading-day period ending on the last trading day of that month. In the event that at the expiration of the cure period, both a US$1.00 closing share price on the last trading day of the cure period and a US$1.00 average closing share price over the 30 trading-day period ending on the last trading day of the cure period are not attained, the NYSE will commence suspension and delisting procedures. In addition, we understand that the NYSE has a policy to suspend trading immediately and commence delisting procedures if the market price of securities falls to US$0.16 or less. We received a letter from the NYSE dated July 23, 2021 notifying us that the stock prices of the ADSs are below compliance standards due to the fact that the average closing price of the ADSs was less than $1.00 for a consecutive 30 trading-day period. In response to the letter from the NYSE, we changed the ratio of the ADSs representing our Class A ordinary shares from each 25 ADSs representing one Class A ordinary share to each two ADSs representing one Class A ordinary share, effective August 31, 2021. However, we cannot assure you that the ADSs will remain in compliance with the NYSE listing rules going forward. If the ADSs are delisted from the NYSE, the liquidity and value of an investment in the ADSs will be materially and adversely affected.
Ability to Sell
Total Risks: 8/87 (9%)Below Sector Average
Competition1 | 1.1%
Competition - Risk 1
The Group faces intense competition in the Group's industry, which could divert student to the Group's competitors, lead to pricing pressure and loss of market share, and significantly reduce the Group's gross billings and net revenues.Demand1 | 1.1%
Demand - Risk 1
If the Group fails to increase student enrollments, the Group's net revenues may decline, and the Group may not be able to maintain growth.Added
Sales & Marketing4 | 4.6%
Sales & Marketing - Risk 1
If the Group is unable to conduct sales and marketing activities cost-effectively, the Group's results of operations and financial condition may be materially and adversely affected.Added
Sales & Marketing - Risk 2
The Group faces risks associated with the online live streaming course delivery model.Added
We believe that, even with the proliferation of internet and mobile devices in China, some of the Group's target students may still be inclined to choose traditional face-to-face lessons offered by offline learning providers over online courses as they find the former more intimate and reliable. We cannot assure you that the Group's live streaming course delivery format will continue to be attractive to students in the future. If the Group's live streaming course delivery model becomes less appealing to students, the Group's business and prospects may be affected. In addition, there is no assurance that the Group's live streaming capacity will be able to support a growing number of students accessing the Group's courses online without any service interruptions. Furthermore, we cannot assure that the Group will be able to address PRC regulatory and legislative developments relating to online streaming business. See "-The Group faces regulatory risks and uncertainties with respect to the licensing requirement for the online transmission of internet audio-visual programs" and "-The failure to obtain and maintain other approvals, licenses, permits or filings applicable to the Group's business could have a material adverse impact on the Group's business, financial conditions and results of operations."
Sales & Marketing - Risk 3
To the extent the Group relies on certain types of course offerings to generate revenues, the Group will be subject to concentration risks, including risks resulting from changes in government policies.The Group's reliance on certain types of course offerings may expose the Group to concentration risks. For example, the Group has historically relied on the Group's Self-taught Higher Education Examination, or the STE course offerings, to generate revenues. In recent years, the interest, professional skills and professional certification preparation course offerings have contributed to an increasing proportion of the Group's overall revenues. In 2021, 2022 and 2023, the Group's interest, professional skills and professional certification preparation courses represented approximately 31.7%, 47.9% and 67.1%, respectively, of the Group's net revenues, and approximately 46.0%, 83.1% and 98.4%, respectively, of the Group's gross billings. In addition, the Group's interest, professional skills and professional certification preparation courses represented approximately 69.6%, 90.4% and 95.0%, respectively, of the Group's new student enrollments in 2021, 2022 and 2023.
The interest, professional skills and professional certification preparation course offerings include diversified course offerings, and thus we believe the Group currently is not reliant on certain types of course offerings for revenue generation. However, if the Group become reliant on certain types of course offerings to generate revenues in the future, and if there are significant reductions in the perceived value of any of the courses on which the Group relies significantly to generate the Group's revenues or gross billings, the demand for and attractiveness of the Group's course offerings may be adversely affected, which could have an adverse impact on the Group's financial condition and results of operations.
Sales & Marketing - Risk 4
The sale or availability for sale of substantial amounts of ADSs could adversely affect their market price.Sales of substantial amounts of the ADSs in the public market, or the perception that these sales could occur, could adversely affect the market price of the ADSs and could materially impair our ability to raise capital through equity offerings in the future. We cannot predict what effect, if any, market sales of securities held by our significant shareholders or any other shareholder or the availability of these securities for future sale will have on the market price of the ADSs.
Brand / Reputation2 | 2.3%
Brand / Reputation - Risk 1
The Group's business depends on the continued success of the Group's brand "Sunlands," and if the Group fails to maintain and enhance recognition of the Group's brand, the Group may face difficulty enrolling new students, and the Group's reputation and operating results may be harmed.Added
Brand / Reputation - Risk 2
The Group may be adversely affected by any negative publicity concerning the Group and the Group's business, shareholders, affiliates, directors, officers and employees and the industry in which the Group operates, regardless of its accuracy, which could harm the Group's reputation and business.Added
Negative publicity about the Group and the Group's business, shareholders, affiliates, directors, officers, and teachers and other employees, as well as the industry in which the Group operates, can harm the Group's operations. The Group has been exposed to negative publicity concerning refund dispute, administrative penalty, alleged improper or misleading statement made in the Group's sales and marketing activities, and student recruitment for unqualified institutions in the past. For example, the Group was reported to have recruited students from January 2021 to January 2022 for Morrison University in the state of Nevada. The recruitments were made pursuant to the Group's cooperation with a company in China (the "Partnering Company") claiming to have obtained authorization from Morrison University. It was revealed that the authorization was inauthentic and Morrison University had no legal right to operate within the state of Nevada. As of the date of this annual report, the Group is seeking to hold the Partnering Company liable through legal actions. The negative publicity surrounding this incident has and may in the future harm the Group's reputation. The Group may be involved in disputes with the affected students, especially if the Group is not able to fulfil the Group's obligations under the agreements between the Group and the students. While the Group endeavors to ensure that the overseas institutions with whom the Group partners are qualified, we cannot assure you that the Group's partnering institutions will timely renew their necessary licenses or qualifications when they become due or that the Group will be able to identify any unqualified institutions accurately in a timely manner or at all.
Negative publicity concerning these parties could be related to a wide variety of matters, including, but are not limited to:
- alleged misconduct or other improper activities committed by students or the Group's directors, officers, and teachers and other employees, including misrepresentation made by the Group's employees to potential students during sales and marketing activities;- false or malicious allegations or rumors about the Group or the Group's directors, shareholders, affiliates, officers, and teachers and other employees;- complaints by students about the Group's education services and sales and marketing activities;- tuition refund disputes between the Group and students or administrative penalties;- security breaches of confidential student or employee information;- employment-related claims relating to alleged employment discrimination, wage and hour violations; and - governmental and regulatory investigations or penalties resulting from the Group's failure to comply with applicable laws and regulations.
In addition to traditional media, there has been an increasing use of social media platforms and similar devices in China, including instant messaging applications, such as Weixin/WeChat, social media websites and other forms of internet-based communications that provide individuals with access to a broad audience of consumers and other interested persons. The availability of information on instant messaging applications and social media platforms is virtually immediate as is its impact without affording the Group an opportunity for redress or correction. The opportunity for dissemination of information, including inaccurate information, is seemingly limitless and readily available. Information concerning the Group and the Group's shareholders, directors, officers and employees may be posted on such platforms at any time. The risks associated with any such negative publicity or incorrect information cannot be completely eliminated or mitigated and may materially harm the Group's reputation, business, financial condition and results of operations.
Tech & Innovation
Total Risks: 7/87 (8%)Below Sector Average
Innovation / R&D2 | 2.3%
Innovation / R&D - Risk 1
Failure to adequately and promptly respond to changes in the exams students must take to pursue their desired degrees, diplomas or certifications could cause the Group's education services to be less attractive to students.Added
Innovation / R&D - Risk 2
The Group may not be able to timely improve or expand course and educational content offerings in a cost-effective manner to make them appealing to existing and prospective students, or at all.Added
The Group regularly and constantly updates existing courses and educational content and develops new courses and educational content to meet student's demand and the latest market trends. The revisions, improvements and expansions of existing course and content offerings and the development of new course and content offerings may not be accepted by existing or prospective students. Even if the Group is able to develop acceptable new course and educational content offerings, the Group may not be able to introduce them as quickly as students require or as quickly as the Group's competitors introduce competing offerings. The process of performing detailed market research and recruiting qualified faculty for new course and educational content offerings could be costly and time-consuming. Furthermore, offering new courses or content or upgrading existing ones may require the Group to make significant investments in educational content development, increase sales and marketing efforts and reallocate resources from other uses, all of which may not be successful. If the Group is unsuccessful in pursuing course and educational content development and upgrading opportunities due to the financial constraints, failure to attract qualified faculty, or other factors, the Group's ability to attract and retain students could be impaired and the Group's financial results could suffer.
Trade Secrets2 | 2.3%
Trade Secrets - Risk 1
If the Group fails to protect the Group's intellectual property rights, the Group's brand and business may suffer.Trade Secrets - Risk 2
The Group may from time to time be subject to infringement claims relating to intellectual properties of third parties.We cannot assure you that the Group's course offerings and educational contents and the Group's IT technologies and platforms do not or will not infringe upon copyrights or other intellectual property rights held by third parties. The Group may encounter disputes from time to time over rights and obligations concerning intellectual properties, and the Group may not prevail in those disputes.
The Group has adopted policies and procedures to prohibit the students and employees from infringing upon third-party copyright or intellectual property rights. However, we cannot ensure that they will not, against the Group's policies, use third-party copyrighted materials or intellectual property without proper authorization in the Group's classes or via any medium through which the Group provides services. The Group may incur liability for unauthorized duplication or distribution of materials posted on the Group's websites or used in the Group's classes. The Group has been involved in claims against the Group alleging the Group's infringement of third-party intellectual property rights and the Group may be subject to such claims in the future. The Group has not entered into any licensing arrangements with, or otherwise obtained any consent from, the government agencies administering the STE exams for using certain exam questions in the Group's quiz banks. Although the Group has never been subject to any legal or administrative penalties or proceedings relating to the Group's use of these sample questions, we cannot assure you that the Group will not be subject to infringement claims associated with the Group's use of real STE questions in the future. Any such intellectual property infringement claim could result in costly litigation and divert the Group's management attention and resources, which in turn could negatively affect the Group's business, financial condition and prospect.
Cyber Security1 | 1.1%
Cyber Security - Risk 1
If the Group's security measures are breached or fail and result in unauthorized disclosure of data by the Group's employees or the Group's third-party agents, the Group could lose existing students, fail to attract new students and be exposed to protracted and costly litigation.Technology2 | 2.3%
Technology - Risk 1
The Group's operations depend on the performance of the internet infrastructure and telecommunications networks in China.Technology - Risk 2
Disruption to or failures of the Group's IT infrastructure could reduce student satisfaction and could harm the Group's operations.Added
The performance and reliability of the Group's IT infrastructure is critical to the Group's operations and reputation. The Group provides course offerings and educational content to students and faculty primarily through the Group's applications and platforms built upon Genesis, the Group's proprietary IT infrastructure. In addition, the Group's employees, including the faculty and sales and marketing personnel, rely on the Group's integrated IT infrastructure to carry out their marketing, sales, operation and teaching functions. As part of their educational experience, students interact with their peers and the Group's faculty via the platforms on a frequent basis. Accordingly, any errors, defects, disruptions or other performance problems with the Group's IT infrastructure could damage the Group's reputation, decrease student satisfaction and retention, adversely impact the Group's ability to attract new students and expand the Group's course offerings, and materially disrupt the Group's operations. If any of these occur, the Group's business operations, reputation and prospects could be harmed.
Macro & Political
Total Risks: 5/87 (6%)Below Sector Average
Economy & Political Environment2 | 2.3%
Economy & Political Environment - Risk 1
Changes in China's economic, political or social conditions or government policies could have a material adverse effect on the Group's business and operations.Economy & Political Environment - Risk 2
The PRC government's significant oversight over the Group's business operation in China could result in a material adverse change in the Group's operations in China and the value of the ADSs. The Chinese government may intervene or influence the Group's operations in China at any time, or may exert more control over offerings conducted overseas and/or foreign investment in China-based issuers. Any actions by the Chinese government to exert more oversight and control over offerings that are conducted overseas and/or foreign investment in China-based issuers could significantly limit or completely hinder our ability to offer or continue to offer securities to investors and cause the value of such securities to significantly decline or become worthless.Changed
The PRC government has significant oversight and discretion over the conduct of the Group's business and may intervene with or influence the Group's operations as the government deems appropriate to further regulatory, political and societal goals. The PRC government has recently published new policies that adversely affected educational industry, especially the educational services related to K-12 students, and we cannot rule out the possibility that it will in the future further release regulations or policies regarding educational industry that could further adversely affect the Group's business, financial condition and results of operations. Furthermore, the PRC government has also recently indicated an intent to exert more oversight and control over securities offerings and other capital markets activities that are conducted overseas and foreign investment in China-based issuers like us. For details, see "Item 3. Key Information-D. Risk Factors-Risks Related to Doing Business in China-Uncertainties with respect to the PRC legal system, including uncertainties regarding the enforcement of laws, and changes in policies, laws and regulations in China, could adversely affect the Group. The enforcement of laws and rules and regulations in China may change quickly with little advance notice, which could result in a material adverse change in the Group's operations and the value of the ADSs." Any such action, once taken by the PRC government, could significantly limit or completely hinder our ability to offer or continue to offer securities to investors and cause the value of such securities to significantly decline or in extreme cases, become worthless.
Natural and Human Disruptions1 | 1.1%
Natural and Human Disruptions - Risk 1
The Group faces risks related to natural disasters, extreme weather conditions, health epidemics and other catastrophic incidents, which could significantly disrupt the Group's operations.Added
Capital Markets2 | 2.3%
Capital Markets - Risk 1
Governmental control of currency conversion may limit the Group's ability to utilize the Group's net revenues effectively and affect the value of your investment.Capital Markets - Risk 2
Fluctuations in exchange rates could have a material and adverse effect on the Group's results of operations and the value of your investment.The value of Renminbi against U.S. dollars and other currencies may fluctuate and is affected by, among other things, changes in political and economic conditions and the foreign exchange policy adopted by the PRC government. On July 21, 2005, the PRC government changed its policy of pegging the value of Renminbi to U.S. dollars. Following the removal of the U.S. dollar peg, Renminbi appreciated more than 20% against U.S. dollars over the following three years. Since June 2010, Renminbi has started to appreciate slowly against U.S. dollars, though there have been periods when U.S. dollars has appreciated against Renminbi. On August 11, 2015, the PBOC allowed Renminbi to depreciate by approximately 2% against U.S. dollars. Since then and until the end of 2016, Renminbi has depreciated against U.S. dollars by approximately 10%. It is difficult to predict how long such depreciation of Renminbi against U.S. dollars may last and when and how the relationship between Renminbi and U.S. dollars may change again.
All of the Group's revenue and substantially all of the Group's costs are denominated in Renminbi. We are a holding company and we rely on dividends paid by our operating subsidiaries in China for our cash needs. Any significant revaluation of Renminbi may materially and adversely affect the Group's results of operations and financial position reported in Renminbi when translated into U.S. dollars, and the value of, and any dividends payable on, the ADSs in U.S. dollars. To the extent that we need to convert U.S. dollars we receive from the initial public offering into Renminbi for our operations, appreciation of Renminbi against U.S. dollars would have an adverse effect on Renminbi amount we would receive. Conversely, if we decide to convert our Renminbi into U.S. dollars for the purpose of making payments for dividends on our ordinary shares or ADSs or for other business purposes, appreciation of U.S. dollars against Renminbi would have a negative effect on the amount of U.S. dollars.
See a full breakdown of risk according to category and subcategory. The list starts with the category with the most risk. Click on subcategories to read relevant extracts from the most recent report.
FAQ
What are “Risk Factors”?
Risk factors are any situations or occurrences that could make investing in a company risky.
The Securities and Exchange Commission (SEC) requires that publicly traded companies disclose their most significant risk factors. This is so that potential investors can consider any risks before they make an investment.
They also offer companies protection, as a company can use risk factors as liability protection. This could happen if a company underperforms and investors take legal action as a result.
It is worth noting that smaller companies, that is those with a public float of under $75 million on the last business day, do not have to include risk factors in their 10-K and 10-Q forms, although some may choose to do so.
How do companies disclose their risk factors?
Publicly traded companies initially disclose their risk factors to the SEC through their S-1 filings as part of the IPO process.
Additionally, companies must provide a complete list of risk factors in their Annual Reports (Form 10-K) or (Form 20-F) for “foreign private issuers”.
Quarterly Reports also include a section on risk factors (Form 10-Q) where companies are only required to update any changes since the previous report.
According to the SEC, risk factors should be reported concisely, logically and in “plain English” so investors can understand them.
How can I use TipRanks risk factors in my stock research?
Use the Risk Factors tab to get data about the risk factors of any company in which you are considering investing.
You can easily see the most significant risks a company is facing. Additionally, you can find out which risk factors a company has added, removed or adjusted since its previous disclosure. You can also see how a company’s risk factors compare to others in its sector.
Without reading company reports or participating in conference calls, you would most likely not have access to this sort of information, which is usually not included in press releases or other public announcements.
A simplified analysis of risk factors is unique to TipRanks.
What are all the risk factor categories?
TipRanks has identified 6 major categories of risk factors and a number of subcategories for each. You can see how these categories are broken down in the list below.
1. Financial & Corporate
- Accounting & Financial Operations - risks related to accounting loss, value of intangible assets, financial statements, value of intangible assets, financial reporting, estimates, guidance, company profitability, dividends, fluctuating results.
- Share Price & Shareholder Rights – risks related to things that impact share prices and the rights of shareholders, including analyst ratings, major shareholder activity, trade volatility, liquidity of shares, anti-takeover provisions, international listing, dual listing.
- Debt & Financing – risks related to debt, funding, financing and interest rates, financial investments.
- Corporate Activity and Growth – risks related to restructuring, M&As, joint ventures, execution of corporate strategy, strategic alliances.
2. Legal & Regulatory
- Litigation and Legal Liabilities – risks related to litigation/ lawsuits against the company.
- Regulation – risks related to compliance, GDPR, and new legislation.
- Environmental / Social – risks related to environmental regulation and to data privacy.
- Taxation & Government Incentives – risks related to taxation and changes in government incentives.
3. Production
- Costs – risks related to costs of production including commodity prices, future contracts, inventory.
- Supply Chain – risks related to the company’s suppliers.
- Manufacturing – risks related to the company’s manufacturing process including product quality and product recalls.
- Human Capital – risks related to recruitment, training and retention of key employees, employee relationships & unions labor disputes, pension, and post retirement benefits, medical, health and welfare benefits, employee misconduct, employee litigation.
4. Technology & Innovation
- Innovation / R&D – risks related to innovation and new product development.
- Technology – risks related to the company’s reliance on technology.
- Cyber Security – risks related to securing the company’s digital assets and from cyber attacks.
- Trade Secrets & Patents – risks related to the company’s ability to protect its intellectual property and to infringement claims against the company as well as piracy and unlicensed copying.
5. Ability to Sell
- Demand – risks related to the demand of the company’s goods and services including seasonality, reliance on key customers.
- Competition – risks related to the company’s competition including substitutes.
- Sales & Marketing – risks related to sales, marketing, and distribution channels, pricing, and market penetration.
- Brand & Reputation – risks related to the company’s brand and reputation.
6. Macro & Political
- Economy & Political Environment – risks related to changes in economic and political conditions.
- Natural and Human Disruptions – risks related to catastrophes, floods, storms, terror, earthquakes, coronavirus pandemic/COVID-19.
- International Operations – risks related to the global nature of the company.
- Capital Markets – risks related to exchange rates and trade, cryptocurrency.